Boring But Effective

boring-mortgages That’s how a recent IMF paper characterized Canada’s mortgage market.

Among other things, it compared Canadian and American mortgages and listed several key differences.  Here are the big ones:

  • US mortgages typically don’t have pre-payment penalties.  Canadian mortgages usually do (except for “opens,” which are more expensive).
  • Canadian mortgages are portable. Portability is rare in the US.
  • US mortgages often have higher origination costs (thanks to “points” and fees) than Canadian mortgages.  According to the study, Americans pay $3000-$5000 on a typical purchase, while Canadians pay about $1800.
  • Rate holds are usually free in Canada. American lenders commonly charge for them.
  • Mortgage insurance in Canada covers the entire loan amount. In the US, it usually only covers losses above a LTV ceiling (above 80% for example).
  • In Canada borrowers must pay the entire insurance premium up front. In the US, borrowers pay it monthly and can cancel it when LTV falls below the required threshold (e.g.,  80%).
  • In foreclosure, Canadian lenders have recourse in a borrower’s non-home assets. In the US, that’s usually out of the question due to legalities or costs.
  • Most US mortgages require payments to be made at the beginning of every month. In Canada, we have weekly, bi-weekly, semi-monthly, and monthly payment options.

Some other notable statistics and conclusions:

  • Deposit-taking institutions held 62% of Canadian mortgage debt at the start of 2009.
  • Just 29% of Canadian mortgages are securitized, versus 60% in the US.
  • 45% of Canadian chartered bank mortgages are insured.
  • Home ownership in the US and Canada are both about 68%, despite US homeowners receiving a mortgage interest tax deduction.
  • Canada has fewer options than the US when it comes to mortgage terms over 5 years. The author says that’s due to a five-year maturity cap on government-guaranteed deposit insurance, and the Interest Act’s prepayment penalty limit.
  1. “In foreclosure, Canadian lenders have recourse in a borrower’s non-home assets. In the US, that’s usually out of the question due to legalities or costs.”
    Didn’t know about this. Can someone elaborate on this ?
    Does this mean a Canadian cannot simply walk out of a mortgage if the value of the house drops below the mortgage ? If this is the case then banks really do not have much to lose when lending out to customers with a good “portfolio” (Yeah, that does make sense, Canadian banks are never on the losing end).
    (No, I am not planning to walk out. Just for information :-)

  2. A standard Canadian mortgage contract allows the lender to enforce a “personal covenant” to recover any shortfall left over after the subject property is sold. However, this can be an expensive process for the lender (in some cases the cost of pursuing the shortfall outweighs the potential recovery amount) so it isn’t always enforced.
    Further proof that there is no such thing as a free lunch (at least not in Canada!)

  3. I believe the protections being discussed may be impacted by provincial legislation. In Saskatchewan, for instance, the “Limitations of Civil Rights Act” would prevent a lender from chasing a mortgagor in most instances. If the mortgagor is a natural person, the property is a primary residence, and the mortgage proceeds were used to pay the purchase price of the home the lender would be out of luck.

  4. One thing I like about the US system is that mortgage insurance is not required to cover 100% of the purchase price. Seems like overinsurance in Canada.
    I also like how you pay the mortgage premium alongside your regular payments, but only until you hit the LTV threshold. Seems better for consumers.
    Al R

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