04 Aug Canadians fearing the worst. Will we be like the US?
I’ve had many clients ask me, “how long will these low rates last, and will the banks substantially increase the rate, causing everyone to default, and foreclose on their property? These people fear that what happened to our neighbors, the United States of America, will happen to its friendly counterpart, good ol Canada.
To better understand what happened in the US, and why it will not happen in Canada, you’ve got to understand the differences between our two markets.
Lets start by stating that the major difference between the United States and Canada mortgages is that our mortgages have recourse. If one does not pay their mortgage, causing their lenders to foreclose on their property, that person would be liable for any shortfall they incur. In the US, there is no recourse. Homeowners can walk away from their homes and not worry about being pursued for a deficiency balance. Secondly, mortgages in the US have interest tax deductions. In Canada, for sake of conversation, the majority cannot write off their mortgage interest expense against their income tax, whereas in the US, they can. Canadians are urged to pay off their mortgage sooner than the amortization rate in hopes to save money on interest charged.
Finally, a US mortgage does no have prepayment penalties if you decided to break your mortgage early. This sounds great, but this feature led to serious issues in the US with “Teaser Rates”. Clients would be offered an starting rate for the first couple years of their mortgage knowing that when the rate “reset” in a at the end of the two years, they could simply payout their mortgage with no penalty, and refinance into a longer term or better rate. This strategy works as long as rates don’t increase and house prices don’t decline. Unfortunately, both happened, causing the market to “crash”
Luckily, we live in Canada and there is no reason to have a mortgage any longer than needed. A majority of Canadians choose to pay down their mortgage can quickly as they can, and recent changes to mortgages by our government, ensure that houses cannot be used as bank machines and constantly be refinanced to take out all it’s equity. Paired with lower amortizations, this causes mortgage balances to decline, the owner’s equity to increase, and the chances of defaulting decline. These are some of the reasons mortgage delinquency in Canada is one of the lowest globally.
Of course changes in our nations economy cannot be predicted, like rising interest rates, home owners can protect themselves against these situations by taking advantage of accelerated payments, prepayment privileges and talking a mortgage professional about a personalized plan to reduce their mortgage amount and ensure there is nothing that might negatively effect them down the road.
Feel free to email me if you have any questions, comments or concerns.
Have a great day!