The Mortgage Market in Canada vs. USA

by admin on November 15, 2013

The mortgage markets in Canada and the United States differ not only in size and types of products offered but in terms of regulations and banking policies.

Mortgage Insurance

In Canada, borrowers are required to purchase mortgage insurance if the down payment is less than 20 percent. Federally regulated financial institutions are prohibited from providing mortgage loans under the Bank Act. Borrowers can purchase an insurance policy from private insurance companies or the Canada Mortgage and Housing Corporation. The situation is different in the U.S., at least in terms of legal regulations. Borrowers are not required to purchase mortgage insurance by law. At the same time, Fannie Mae and Freddie Mac buy insured mortgages only, and financial institutions often require that borrowers purchase an insurance policy. Applicants who make a down payment of 20 percent are not required to use insurance. Policies are also purchased for retirement and nursing homes and rental developments.

Mortgages in the U.S. and Canada

The 30-year fixed rate mortgage is the most common product in the United States. In contrast, many Canadians opt for a 5-year fixed rate mortgage. Canadian borrowers can choose from different products such as bridge financing, all inclusive, multiple term, and closed and open mortgages. Banks also offer secured lines of credit, standard and pre-approved mortgages, and equity loans. In the U.S., borrowers can choose from a wide array of financial products, including adjustable and fixed rate loans and federal housing administration loans. A FHA loan is a type of financing that is insured by the Federal Housing Administration. This product is designed for moderate- and low-income families that cannot afford to make a substantial down payment. The loan amount is up to 97 percent while the remaining 3 percent can be in the form of a grant or gift. This is a good solution for young people and first-time home buyers. A VA loan is another option offered to active duty personnel, eligible veterans, and surviving spouses. There are many benefits for borrowers, among which no or low down payment and attractive interest rates. U.S. customers are also offered reverse, interest only, and balloon mortgages. The latter is risky because the entire balance is paid off once the initial period is over. Reverse mortgages are designed for senior citizens who wish to convert their home’s equity into cash. The problem is that loan providers often resort to false advertising to attract customers.

The Sub-prime Mortgage Market

The sub-prime market was less developed in Canada compared to the United States. Most loans in the U.S. were sold to investors before the global financial crisis. In contrast, the majority of mortgages in Canada were offered and retained by financial institutions. The reason is that Canadian credit unions, trust companies, banks, and other establishments have a broad relationship with their clients. They offer a wide selection of products such as vehicle and personal loans, investment instruments, prepaid credit cards, and others.

Financial Institutions That Offer Mortgages

In Canada, the banking system is dominated by RBC,  CIBC, Toronto Dominion, BMO, and other large banks. This is not the case in the United States. The large Canadian banks maintain offices and branches across geographic regions and offer a large variety of products and services. In the U.S., there is a larger number of non-traditional financial institutions. Moreover, Canada is known for more conservative banking practices and business culture than the U.S. Financial institutions in the country implement different risk-management practices to reduce credit losses and the risk of default.

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