As a potential home buyer in Canada, understanding the ins and outs of the mortgage market is crucial. The Canadian mortgage market is regulated by the Office of the Superintendent of Financial Institutions (OSFI) and the Canada Mortgage and Housing Corporation (CMHC), and mortgages are primarily provided by banks, credit unions, and mortgage companies.
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The Role of the Government in Insuring Mortgages
One of the key differences between the Canadian and US mortgage market is that in Canada, the government has a larger role in insuring mortgages. The CMHC, a Crown corporation, insures a significant portion of mortgages in Canada, which allows lenders to offer more lenient lending criteria and lower mortgage rates. This insurance protects the lender in case the borrower defaults on the loan.
As an example, if a borrower has a down payment of less than 20% of the purchase price, they are required to purchase mortgage default insurance. This insurance allows borrowers with less equity in the property to get approved for a mortgage, making home ownership more accessible to a wider range of Canadians.
Mortgage Default Insurance
Another important difference is that in Canada, mortgage borrowers are required to purchase mortgage default insurance if they have a down payment of less than 20% of the purchase price. This insurance protects the lender in case the borrower defaults on the loan. The cost of this insurance is typically added to the mortgage and is based on the size of the down payment and the purchase price of the home.
For example, if the down payment is less than 5% of the purchase price, the cost of the insurance can be as high as 4% of the mortgage amount.
Types of Mortgages Available
In Canada, there are fixed rate and variable rate mortgages available to borrowers. Fixed rate mortgages have an interest rate that remains the same throughout the term of the mortgage, while variable rate mortgages have an interest rate that fluctuates with the prime lending rate.
For example, if a borrower chooses a 5-year fixed rate mortgage, their interest rate and payments will remain the same for 5 years, regardless of changes in the prime lending rate. On the other hand, if a borrower chooses a variable rate mortgage, their interest rate and payments may change with the prime lending rate.
Amortization Period
In Canada, the amortization period for mortgages is typically 25 years, which is shorter than in the US where it is 30 years. This means that Canadian borrowers must make higher monthly mortgage payments, but it also means that they pay off their mortgage faster and build equity in their property more quickly.
For example, if a borrower takes out a $300,000 mortgage with a 25-year amortization period at an interest rate of 3%, their monthly mortgage payment will be around $1,365. In contrast, if they took out the same mortgage with a 30-year amortization period, their monthly mortgage payment would be around $1,265. However, by paying off the mortgage faster, the borrower will save over $50,000 in interest over the life of the mortgage.
Preparing for a Mortgage Application
When preparing for a mortgage application in Canada, it's important to have all necessary documents in order, including proof of income, employment, and assets. Lenders will also want to see a good credit score, which can be improved by paying off debts and avoiding late payments. Additionally, borrowers should shop around for the best mortgage rates and terms from different lenders.
Final Thoughts
In conclusion, understanding the Canadian mortgage market and its regulations can help potential home buyers make informed decisions when buying a home. By being aware of the government's role in insuring mortgages, the requirements for mortgage default insurance, the types of mortgages available, and the shorter amortization period, can help you navigate the market more effectively.
References:
- Office of the Superintendent of Financial Institutions (OSFI)
- Canada Mortgage and Housing Corporation (CMHC)
- Bank of Canada
- Government of Canada – Mortgage default insurance
