Canadian vs. American Mortgages
Although it's sometimes hard to do, Canadians like to emphasize how different
they are from American
friends. In the area of mortgage financing, the basic
concepts and legalities of a mortgage are the same in both
countries. This reflects the British tradition that forms the
backbone of both societies.
Significant distinctions do exist between Canadian and
American mortgages, though, dealing mainly with the
charging and collecting of interest. The differences are so
important that American materials and publications can
mislead and confuse Canadian readers. In some respects
Canadian mortgages are better than American mortgages,
and vice versa. You win some, you lose some. Here are the
key areas where Canadian and American mortgages diverge:
- Canadian mortgages are generally calculated
semiannually (or its equivalent, half-yearly) because of the
Interest Act of Canada. By contrast, American
mortgages are calculated monthly. Borrowers benefit
from the Canadian way, because the effective annual
interest rate is lower for a loan calculated semi-annually
than for one calculated monthly.
- Like rent, American mortgages are payable in advance,
at the start of a period (whether it's monthly, weekly,
bi-weekly or semi-monthly). Canadian mortgages are payable "not in advance," at
the end of the payment period. Once again this benefits Canadian borrowers since
they, rather than the lender, have the use of the money during that time.
- Amortization periods in Canada traditionally have been 25 years. American
amortizations normally run 30 years. Longer amortizations mean lower monthly
payments, but higher overall interest costs. The name of the game is to reduce
the cost of carrying a mortgage (and therefore the amortization), not increase
it.
- With a few exceptions, the maximum mortgage term
available to Canadian borrowers is five years. Part of the reason for this is the different roles
financial institutions play in each country. Canadian
banks and trust companies actually hold the mortgages
they arrange as part of their portfolio of assets. In the
U.S., banks are little more than loan originators who
book mortgages. Often those mortgages will be
transferred on the secondary market to two federal
government agencies, known as "Fannie Mae" and "Freddy
Mac." Since the banks aren't the actual lenders, longer
mortgage terms are possible, often as long as the
amortization itself. These long-term, self-amortizing
mortgages are a distinct benefit to American borrowers.
- Interest deductibility. Mortgage interest on a
principal
residence is deductible against other income in the
United States. That's not the case in Canada, except in
very limited circumstances. Mortgage interest
deductibility has been a dead issue in Canada for well
over a decade, since it was proposed during the
super short tenure of Prime Minister Joe Clark in 1979.
Because mortgage payments in Canada are made from after-tax dollars, the
amount of income that must be earned (and on which tax must be paid) to actually
finance a mortgage is considerably higher than just the amount of interest
payable.
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