When compared to America’s mortgage market, the answer to this question is an emphatic yes. And the main reason is that the Canadian government has made a concerted effort to ensure that the troubles plaguing American lending institutions do not affect their market. Despite an ongoing recession that has affected the global marketplace and the real estate industry in particular, Canada’s mortgage lenders and home buyers continue to remain strong. Although they have taken a hard-line where loans are concerned, enacting measures that America would be hard-pressed to implement at this point, the proof seems to be in the pudding. Canada has clearly found a strategy that works and the rest of the world is being forced to sit up and take notice.
One of the main differences between the Canadian and American systems involves the government directly. Whereas the U.S. government encourages citizens to buy homes by offering tax incentives (the interest paid on a home each year is tax deductible), the Canadian government provides no such encouragement. You still have to pay the same amount of taxes on your earnings whether you own a home or not, ensuring that people who can’t really afford a mortgage aren’t finding a way to purchase a home simply for the tax break.
Further, lenders have much stricter regulations regarding who can get loans and the types of loans offered. For example, less than 5% of mortgage loans in Canada are subprime, and homeowners who owe 80% or more of the value of their property must purchase mortgage insurance through a government agency. That way, it they default, the government steps in to either work out a payment plan to keep owners in their homes, or they simply sell the house and cover any overage to ensure that lenders suffer no loss. And 30-year-fixed rates on loans are simply not done. Although this type of loan is popular in the United States because it protects buyers from fluctuations in interest rates (that could drastically inflate their monthly payments), Canadian lenders generally stick to a five year agreement that must be renewed or refinanced when it expires. In this way, homeowners assume more risk and lenders less.
Finally, Canadian lenders have several avenues of recourse that American lenders rarely enjoy. In the U.S., loans are widely variable. Some allow certain types of recourse while others can leave lenders holding the bag while homeowners simply walk away with assets that should be used to pay off their debt. And there are severe restrictions on which assets banks can attempt to collect, as well as the circumstances that allow for collection. In Canada, on the other hand, mortgage lenders can claim cars, savings, other properties, etc. as a means of paying the balance of a home loan that goes into default and collections.
The long and short of it is this: the Canadian mortgage market is vastly different than that found in the United States. While it certainly places a greater burden on homeowners to live up to their obligations to pay off a loan, it cannot necessarily be called “better” or “worse” than other systems. However, one thing is certain. The mortgage lending market in Canada is stable and will most likely continue the trend in years to come.
About the Author: Leon Harris writes for a Canadian personal finance blog with an emphasis on careers, real estate, politics, and banking.
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I would like to know what percentage of the Canadian people own or are buying their own homes? Also how do the rental properties compared to the US. Availablity and cost? We tried building rental property in this country for some time bit I don’t believe that worked very good either. I believe that is why we were trying the home ownership route.
In the past several years we have seen the average price of a home triple and in some cases quadriple. Much of this has been caused by government programs to help the average consumer afford a home. When the government reduced the down payment required, the sellers simply raised the price so the actual cash required stayed the same. When the banks lowered interest rates, again the price of housing increased thereby costing the consumer the same.
Home ownership is a priviledge…not a right. In a free market society, we make our own economic decisions of where and what we live in. Quebecers have a preference to rent and house prices are a lot lower in Montreal than the other major cities in Canada.
The amount of interest paid on a given property will by far exceed the profit made by the home builder. A 25 year amortization will result in paying TWO & A HALF TIMES the Original Price of the Home. Banks essentially shuffle paper and contribute nothing to the economy. Banks essentially create currency out of thin air…..which leads to inflation & bubbles.
Our banks in Canada are not a healthy as one many think. 12 non-US banks, out of 20, received a share of the $600 billion bailout. RBC Capital Markets, LLC was one of them. All of the Canadian banks are up to their eyeballs in toxic assets & derivatives that they simply don’t understand.