With Canada’s housing market hotter than ever, we’ve recently seen new mortgage rules implemented in order to cool down the market. Many are afraid of a U.S. style housing crash which could cripple our economy. But there are some major differences between the Canadian and American Housing Finance Systems which you may or may not be aware of. These differences may explain why we’re not as likely to experience what our neighbours down south did in 2008.
Canada and U.S. Housing Policy
Canada’s housing policy encourages access to housing through a variety of tenure types; its policy does not explicitly favour homeownership. In the U.S., federal policy actively encourages homeownership. Consistent with this policy, Fannie Mae and Freddie Mac, before the recent economic downturn, were required to support mortgages to low-income borrowers in specific neighbourhoods and geographic areas, as well as to other high-risk groups.
Mortgage Insurance in Canada and the U.S.
In Canada, legislation prohibits federally regulated banks from providing residential mortgages without mortgage loan insurance if the loan is greater than 80 per cent of the purchase price or value of the home. This insurance, which can be purchased from CMHC or private insurers governed under the Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA), covers the entire amount of the loan and is for the entire life of the mortgage.
In the U.S., banks will often require mortgage loan insurance for loans where the borrower makes a down payment of less than 20 per cent, even though there is no legal requirement to do so. This is because for these mortgage loans, Fannie Mae and Freddie Mac are prohibited from purchasing mortgages without a credit enhancement such as mortgage insurance.
Mortgages in Canada and the U.S.
In Canada, the most common mortgage is the five-year fixed-rate closed mortgage. Historically in the U.S., the most common mortgage has been the 30-year fixed-rate open mortgage.
Many mortgage borrowers in Canada have the option of transferring their mortgage within the same lender (including the mortgage insurance) if they decide to sell one property and purchase another. This can be of particular benefit to borrowers if mortgage rates have risen since they obtained or last renewed their mortgage. Mortgage borrowers in the U.S. do not have this option.
In Canada, mortgages are typically “full-recourse” loans, which means the borrower continues to be responsible for repaying the loan even in the case of foreclosure. Lenders can take legal action to recoup money from the homeowner if a foreclosed home is sold for less than the amount owing on the mortgage. In some U.S. jurisdictions, mortgages are “non-recourse,” which means that borrowers can often walk away from their homes and the associated mortgage debt, leaving lenders with no recourse beyond the property.
Mortgage interest on a principal residence can be deducted from taxable income in the U.S.: the larger the mortgage, the more interest that can be deducted. Homeowner mortgage interest is not tax deductible in Canada, so there is no tax incentive for borrowers to prefer a mortgage over rental or maintain higher mortgage balances over the life of a mortgage.