Mortgage Mix Up. Canada versus the United States

By: Lindsay Smith

Mortgage Mix Up. Canada versus the United States


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I have learned quite a bit about American mortgages living with a woman who sold Real Estate in Arizona for over a decade. We have chatted at length about the differences between mortgages here in Canada and those south of the border.

One of the structural differences is that mortgages south of the border are typically taken out for a 30-year period. Here in Canada, you can arrange a mortgage amortized over a 30-year time span, but lenders in Canada will only commit mortgage rates for a maximum of 5 years. (A person can get a longer-term however they are uncommon.) In the event a mortgage taken out has a 1 or 5-year term, once that term is done, the borrower chooses a new term with a mortgage rate set at the current rates. In the USA, a 30-year mortgage will have the same rate from the start to the end of the 30-year amortization period. This is a huge benefit for American homeowners, knowing that their mortgage payments will never change. However, with the market we are experiencing today, this actually is holding back the recovery of the shifted Real Estate market in the USA. Here is why.

The current 30-year mortgage rates in the USA are around 6.8%. The USA has had similar rate increases as we had in Canada starting in 2022. Prior to the rates in the USA increasing they hit a low of 3.22%. What this has done is keep people in their homes. If a homeowner has a rate of 3% and wants to move, they need to discharge their mortgage and take one at the current higher rate. I am certain many homeowners are looking at the values dropping and seeing amazing deals however when they factor in the new rates, the deal doesn’t look as good. What we are seeing in many cities in the USA are historic lows for inventories of homes for sale. Mortgage rates held for 30 years are actually holding the market back from rebounding. Homes take longer to sell, fewer Buyers enter the market and values tend to slide downward. A suburb of Phoenix, Fountain Hills has a year-over-year decrease in value of 19%, and selling times of 71 days as compared to 42 at this time last year. One factor skewing some of the numbers of homes for sale are the high number of new builds that are being listed for sale by builders having issues selling off inventory.

We see trends that work differently in Canada than in the USA. A homeowner with a low mortgage rate can take the mortgage with them to a new home and blend their existing low rate with the current rates. An example would be if a person has a $300,000 mortgage with a 2.5% rate and finds a home they want to move to where they would need a mortgage of $400,000 the lender would keep the 2.5% rate on the first $300,000 and blend it with the extra $100,000 needed at the current rates. This way the homeowner can keep their existing rate on three-quarters of the total new mortgage. This allows people to move and end up with a rate lower than what they could get if they were applying for a brand-new mortgage.

This ability to move with your mortgage is helping “jump-start” our shifted market. In the past 3 weeks Oshawa detached home prices have increased by $38,000 and Whitby by $93,000. Not only are we seeing values increasing, but we are also noticing bidding contests in all Durham communities. In the past week 73% of all homes sold in Oshawa, sold for full price or more than asking.

One of our team members hosted an open house on a home in Oshawa this past weekend. The home was priced at $900,000 and over the 2 days there were over 80 Buyers that toured the home.

It is easy to argue that it is in the lender's best interest that the rates are renegotiated every 1 – 5 years, however, in this inflationary economic cycle, the resetting of rates is a benefit not only to homeowners wishing to move but to Buyers with more homes to choose from.

A quick check informs us that you can get a 5-year mortgage here in Canada for around 4.75% whereas if you are a Buyer in the USA, the rate you would be offered would be 6.2%. There are times when it pays to be a Canadian.

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