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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.