Monday, January 20, 2014

How Canada is not like the United States: Home mortgage edition

The L.A. Times reports:
To begin with, the Canadian system is considerably more creditor-friendly than the U.S. Lenders typically have full recourse in cases of default, meaning they can attach all of a borrower's assets, not only the house. In the U.S. that's not permitted in 11 states, including California, and foreclosure proceedings are complicated even in the other states.

The standard mortgage in Canada isn't the 30-year fixed, as it is in the U.S., but a five-year mortgage amortized over 25 years. That means the loan balance has to be refinanced at the end of five years, exposing the borrower to any increase in rates that has occurred in the interim. Prepayment penalties for borrowers hoping to exploit a decline in rates, on the other hand, are very steep.

This looks as if it's a clear win for banks, which are minimally exposed to increased rates and protected from prepayments. But Canadian mortgages are also portable -- if you move before the five-year term is up you can apply your old mortgage to your new home. (If it's a more expensive home, you take out a new loan for the excess.) That restores some of the balance in the borrower's favor.

An article well worth your time.