Canadian Mortgage Lessons

by Tom Tousignant

in Blog, Home Buying, Mortgages

Delinquency Rate

Sources: U.S.: Mortgage Bankers Association. National Delinquency Survey; Canada: Canadian Bankers Association (converted to quarterly data from monthly by averaging).

The Federal Reserve Bank of Cleveland issued an interesting report comparing the US and Canadian housing markets. In “Why Didn’t Canada’s Housing Market Go Bust?” I learned that overall Canada is more conservative with money and financial risks than we Americans.

  • The most cited estimate is that subprime lenders had a market share of roughly 5 percent in 2006—compared to 22 percent in the U.S. (Mortgage Architects, 2007).
  • Moreover, the Canadian subprime market never expanded significantly into newer products, such as interest-only or negative-amortization mortgages, whose popularity grew rapidly in the U.S. from 2003 to 2006.
  • Instead, the Canadian subprime market mainly offered products popularized in the U.S. during the 1990s, such as longer amortization periods for loans (from 25 to 40 years), and mainly targeted near-prime borrowers.
  • Unlike the U.S., where the mainstay of the mortgage market is the 30-year fixed mortgage, the most common mortgage product in Canada is a five-year fixed rate mortgage (with a 25-year amortization period).

The last bullet is most interesting to me.  With a 5 year fixed rate, and a 25 year amortization, you have to refinance your mortgage every five years – at the current market rates.  This really lowers the lenders’ risk since they are going to reset the interest rates and never be stuck with a loan at 5% when the market is at 10%.

The shorter amortization term makes the payment higher – making it harder to overspend on your house.  A mortgage plan that keeps you from overspending isn’t  a bad idea.

Would our Canadian friends have acted like so many here in the USA if they were offered the same sub-prime loans?

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