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jimjohn
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canadian mortgages vs usa mortgages 02 Dec 2007, 09:59
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im not very familiar with this topic but i was wondering if someone could explain to me in basic terms what are the major differences between the two and why prepayment risk is so much different in the us than it is in canada. thanks
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Hjort
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canadian mortgages vs usa mortgages 04 Dec 2007, 21:00
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Prepayment risk is higher in the US in part because prepayment penalties are much less common in the US than in Canada (although prepayment penalties are relatively more common for subprime loans in the US). Subprime instability is more imporant in the US since these loans make up a much larger percentage of the US market- roughly 20% vs. 5% in Canada.
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cabro57
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canadian mortgages vs usa mortgages 22 Jul 2009, 07:45
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Hjort
Prepayment risk is higher in the US in part because prepayment penalties are much less common in the US than in Canada (although prepayment penalties are relatively more common for subprime loans in the US). Subprime instability is more imporant in the US since these loans make up a much larger percentage of the US market- roughly 20% vs. 5% in Canada.
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It's been a very long while but somehow I stumbled upon this. The most important difference between Canadian and US mortgages is that the overwhelming majority Canadian mortgages are basically ARMs. Canada's 5-6 largest banks, who hold a big portion of the mortgage market, don't offer 30-year fixed loans. A few may offer 10- or 15-year fixed loans, but it's definitely not their most popular product. The biggest seller in Canada is the 5-year fixed-rate closed mortgage, which has the rate fixed for 5 years, after which there's a renegotiation (and generally no fee to switch from one lender to another at that point). The amortization period is anywhere from 15 to 35 years.

With respect to prepayment risk, I guess the idea is that the market value of those mortgages stays much closer to the principal because the interest rate is adjusted every 5 years at most. From a borrower's point of view, this alleviates the incentive to sit on the mortgage if rates have gone up, or the incentive to prepay or refinance if rates have gone down.