Another way Americans get better deals: cheap, flexible, 30-year mortgages

Canadians look south at home loan heaven

Canadians look south at home loan heaven

Photo illustration by Taylor Shute

Finance Minister Jim Flaherty has been scolding mortgage lenders who offer their customers five-year fixed rates below three per cent, lest they spark a flurry of home buying and further inflate Canada’s housing bubble. Meanwhile, south of the border, where the housing market is just beginning to claw its way back from its 2007 implosion, banks are wooing nervous consumers with rates that are just a touch higher—at 3.63 per cent—but can be locked in for 30 years. Not only is that a far better deal than Canada’s current 10-year fixed rates of 3.69 per cent, the maximum term most lenders will offer, but it’s a great way to guard against an inevitable rise in interest rates down the road.

On the surface, it seems like another case of Canadians getting a worse deal than their American counterparts—not unlike when they buy a hardcover book or a new car. Across the board, mortgages are now cheaper in the U.S., where interest rates are currently lower and competition much greater in general. The 30-year mortgages are also not, technically, fixed-rate, because they can easily be refinanced by borrowers who want to take advantage of lower rates. “The person borrowing can get out at any time by switching to another lender, or just by paying it off,” says Nicholas Rowe, an associate professor of economics at Ottawa’s Carleton University. “The rates can’t go up, but they might go down if you find a better deal.”

While a great deal for borrowers, Rowe cautions the U.S.-style 30-year mortgage still comes at a price. Since lenders face an increased risk if rates fall, they need to compensate by charging slightly higher interest rates. (In contrast, the most popular Canadian mortgages are “closed,” meaning they can’t be refinanced or paid off early without incurring a penalty, and are for significantly shorter terms—usually five years.) Patrick Lawler, the chief economist of the U.S. Federal Housing Finance Agency, said in a panel discussion two years ago that U.S. borrowers pay at least an extra 0.25 to 0.5 percentage point in rates in exchange for the option to prepay without penalty and sometimes “another percentage point or two” to have a long-term fixed rate, according to a report in the Wall Street Journal. Nevertheless, as many as 80 per cent of borrowers in America opt for 30-year mortgages, which are backed by housing finance giants Fannie Mae and Freddie Mac (another reason why U.S. rates are cheaper despite heightened risk).

It’s not clear why the two countries’ mortgage-lending practices evolved so differently. A 2006 report by the Federal Reserve Bank of San Francisco suggested that “the 30-year FRM (fixed-rate mortgage) was originally designed to avoid the refinancing risk that contributed to the banking crisis during the Great Depression.” (Mortgages at that time, the paper noted, were not unlike the “alternative mortgages” that helped fuel the U.S. housing bubble.) Other reasons offered for the differing approaches include a greater tendency among Canadian banks to match up their loans with term deposits, which are only insured up to a maximum of five years by the Canadian Deposit Insurance Corp., and Canadian banks’ practice of holding most of their mortgage loans on their balance sheets. “This makes Canadian banks more risk-averse and less willing to take on mortgages in excess of 10 years,” says Kerri-Lynn McAllister, the chief marketing officer for mortgage rate website Ratehub.ca.

McAllister points to a recent report by the Bank of Nova Scotia that estimated only 28 per cent of Canadian mortgages are packaged and sold as securities—mostly through the Canada Mortgage and Housing Corporation. In contrast, as many as two-thirds of U.S. mortgages are packaged and sold to investors as securities, making it easier for lenders to spread around the risk associated with longer-term loans. The same U.S. mortgage securitization practices were a major factor leading to the 2007 subprime mortgage crisis—a downside if there ever was one.

It all points to a Canadian system that should be more conservative while also offering highly competitive rates. But it hasn’t always worked out that way. While current comparisons are skewed by the fact that the U.S. Federal Reserve’s trendsetting rate continues to hover just above zero while the Bank of Canada’s sits at one per cent, Rowe says that, with few exceptions, borrowing rates have historically been lower in the U.S.—a trend that’s unlikely to change any time soon. So while American consumers once again come out ahead (the 2007 housing crash notwithstanding), Canadians can take solace in knowing their cross-border neighbours are, for once, paying more than they should be, too.

Canadian mortgages

  • 28% of Mortgages are sold as securities
  • Maximum term 10 years mortage rate 3.69%

American mortgages

  • 66% of Mortgages are sold as securities
  • Maximum term 30 years mortage rate 3.63%


Another way Americans get better deals: cheap, flexible, 30-year mortgages

    • The mortgage interest on homes can be tax deductible as well in Canada, if it is a revenue property. The Americans pay capital gains on their primary residence when they sell, here we don’t.

      • There is a 250K exemption on the capital gains on your primary residence, if your a couple thats 500K. The tax decution is a huge benefit for middle class families, especially in the north east where home prices are very high.


        The monthly payment of a $650K condo with a 20% downpayment in New York is $2,340. $1,544.4 of this is interest payment and $772.20 goes towards the principal on a 30 year fixed 3.5% loan. If you were at a marginal tax rate of %42 (which you would at least have to be to afford the condo) you would pay $650 less in taxes a month.

        So your monthly net mortgage cost after the tax benefit would be $1,691.752 – which actually makes quite affordable to own. The same unit would rent for at least $3000-3500.

      • [thanks for the update, Engin]

        As for Commonsense’s comment, big woop, but we’re not talking about buying homes as revenue property, which is a business venture; we’re talking about buying homes as homes.

        Your 10-year mortgage for 300 k, fixed rate 4%, makes you pay the tidy sum of $107,000 in interest alone.
        By contrast, it’s unlilkely that anyone is making a profit of $107 k on the sale of their home today after 10 years, and, if so, it isn’t taxed at 100%!

      • Or you simply pay off your mortgage, and then borrow money for investment purposes using your house as collateral.

        That way the interest costs are tax deductible while the capital gains exemption still applies to the house, since it is still a residence and not a revenue property.

        That’s how prosperous people end up benefiting more from the vagaries of the income tax act than do the less prosperous.

        • However, if you use your house as collateral and something goes wrong with paying the other house, you could stand to loose both. Better to not include your paid home and save for a downpayment for the other house by continuing to save your old mortgage payments. If something goes wrong with paying off the second house, then your first home is safe. Your interest costs and renovations and upkeep for the second house are still tax deductible without affecting your first paid home. That’s playing it safer.

      • No, Americans do not pay capital gains on their primary residence when they sell.

  1. Low mortgage rates lead to house price-inflation.It is the same with student loans, low rates on student loans lead to tuition price-inflation. Low mortgage rates only make sense as a policy initiative when there is a need to inflate the price of houses. This is needed in the US, but not in Canada.

  2. The mortgage industry in the United States has been effectively nationalized and the losses and future risk dumped on the future taxpayer since the crisis.

    30-year fixed rate mortgages are extremely risky for the lender, or the insurer of the lender. Essentially the government and future taxpayer takes all that risk. It could not be offered without government backing.

    It is basically a huge subsidy to the upper middle class in the United States.

    Right now the government is both sucking and blowing. It finances and insures these mortgages through the FHA, and now government-owned Fannie Mae and Freddie Mac, and the FED is buying the mortgages as part of its QE infinity.

    The future taxpayer is being left totally exposed. This is market fixing and rigging by the government.

    • Yup, when banks start going under again after the next stock/housing bubble collapses, it will be the Treasury and the Fed purchasing all those 3.63% 30 year mortgages and taking them off the bank’s books. Taxpayers subsidizing home purchases. This is a “better deal” according the Macleans. Not that we don’t have our own problems and risks, but the Americans as always succeed – and fail – more spectacularly than us.

  3. The same “deals” that led to the sub prime mortgage meltdown and the world wide economic collapse that is still going on.
    U.S. economic policies -or what passes for them- are not our friends.

    • It’s astounding how quickly people forget that. The damage from the last bubble has not even healed, but we’ve got Macleans columnists already cheerleading the next bubble.

  4. The American system isn’t cheaper on a total value basis, just on a monthly cost basis if you’re only looking at a short term as opposed to making payments for three times as long.

    The shorter loan length also helps ensure that if a housing bubble bursts, you’re not stuck underwater on your home because you’re repaying the principle so slowly on such an extended length loan with an already high monthly payment. The first four years living in my home we were on a 30 year loan, and the principal went down by about $6,000 US. Since refinancing to the shorter loan, the principal has gone down by more than $14,000 US in three years.

    Your monthly payments up in the Great White North might be higher because of the compacted loan length, but your debt length is short enough that you can reasonably expect to have a home paid off at least once in your adulthood, particularly if you don’t move frequently. Also, people who really can’t afford to buy are less apt to even attempt buying when you have it set up as you do up there. Your housing prices seem high to me for now, but some of that may be the value of the dollar difference and the regions I’ve looked at.

    Equating refinancing as a means of not keeping a fixed rate seems like a false start to an American. The refinancing process renews the duration of the loan. Individual loans are fixed rates possibly, but we also have ARMs and balloon loans as mortgaging options. (Not that I’d advise any of that nonsense to anyone).

    Shorter loans with lower interest are definitely better than the standard American 30 year mortgage. The thirty year mortgage is a relatively recent thing in terms of being standard mortgaging procedure. It makes banks bundles of cash in interest payments though. 30 year loans makes payments affordable monthly, but costs you thousands upon thousands of dollars in the long run. Don’t be envious of the American system.

  5. Unreal that there are some who would look to American mortgage policies with envy. They’re not even out of the woods from the last housing bubble collapse yet… in fact they seem busy inflating another bubble… and we’re already envious of them again? We should probably give that envy thing a rest for another decade or so.

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