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In Canada, banks offer fixed and floating rate mortgages; the mortgage rate is always prime + some %. If you get a fixed-rate mortgage, you're locked in to you

by pycal 9y ago

In Canada, banks offer fixed and floating rate mortgages; the mortgage rate is always prime + some %. If you get a fixed-rate mortgage, you're locked in to your rate for 5 years regardless of how the Bank of Canada changes the prime rate. This has been the product of choice for Canadians for the last several years because it protects you against rising interest rates, and rates have had nowhere to go but up. If you get a floating-rate, your rate moves when the Bank of Canada moves the rate. This is desirable if you think the BoC is going to lower interest rates. Self-plug - I made a tool to look at how sensitive your monthly mortgage payment is to movements in interest rate: https://pycal.github.io/real-time-ammortization/ https://pycal.github.io/real-time-ammortization/

emodendroket 9y ago
Yeah, but locking in a rate for 5 years is so different from locking it in for 30 that it seems kind of misleading to say "both places have fixed-rate mortgages." I'm actually a little unclear on the specifics here; is it that you have a balloon payment and the typical thing is to get another, smaller loan to pay that off?
- goodcanadian 9y ago
  Technically, yes, you are on the hook for a balloon payment. In practice, however, you would get a new mortgage for the remainder owing. You can, of course, be screwed in the event of rising interest rates or collapsing property values. Unlike the US, there are hefty fees for early payoff of the mortgage, so if you were in the position to pay it off, you would probably want to wait until the end of the current mortgage (depending on lots of different factors, of course).
  - emodendroket 9y ago
    OK, got it. Frankly, it seems like a system that makes owning a home less attractive, but I suppose US policy has been driven by the idea that home ownership should be encouraged.
    - goodcanadian 9y ago
      Other differences: Canada does not have a mortgage interest tax deduction nor does it have low/no down payment mortgage options. Generally, the more conservative approach to banking makes things more sane and is part of the reason that Canada rode out the global financial crisis relatively unscathed.
      - emodendroket 9y ago
        Well, it also makes people less likely to own homes, and I'm not really convinced you couldn't have a relatively cautious system that still had long, federally backed mortgage terms or tax deductions or even relatively low down payment options. The big crash was preceded by lots of outright fraud.
        goodcanadian 9y ago
        I got curious, so I did a google search. It appears that the home ownership rate is very similar between Canada and the US. At the moment, it is higher in Canada as the US is still recovering from the effects of the mortgage crisis. That said, I don't disagree with you. The US has made a policy of promoting home ownership, more so than other countries. That has potentially come with adverse side effects. On the other hand, Canada's relative banking conservatism has arguably prevented Canada's own housing bubble from bursting which could be, itself, a bad thing.
        emodendroket 9y ago
        I wouldn't have guessed the rates would be similar. That's interesting.
    - deleted 9y ago
      [deleted]
    - sliverstorm 9y ago
      It doesn't seem like there's anything radical about a standard, simple interest, fixed rate loan with no balloon payment. Setting aside questions of rate and term, your typical USA 20% down 30 year fixed mortgage is about as simple/ordinary/traditional as loans get. Which makes me think it's not really any special favoritism in the US...
srhngpr 9y ago
Love the tool to help visualize; however, you need to allow mortgage period to be up to 30 years. CHMC insured mortgages (if you put anything less than 20% down payment have a maximum of 25 years); however, many banks offer up to 30 years. As an example, see the TD Bank mortgage calculator: https://tools.td.com/mortgage-payment-calculator/ https://tools.td.com/mortgage-payment-calculator/

by pycal 9y ago

emodendroket 9y ago

Yeah, but locking in a rate for 5 years is so different from locking it in for 30 that it seems kind of misleading to say "both places have fixed-rate mortgages." I'm actually a little unclear on the specifics here; is it that you have a balloon payment and the typical thing is to get another, smaller loan to pay that off?

goodcanadian 9y ago
Technically, yes, you are on the hook for a balloon payment. In practice, however, you would get a new mortgage for the remainder owing. You can, of course, be screwed in the event of rising interest rates or collapsing property values. Unlike the US, there are hefty fees for early payoff of the mortgage, so if you were in the position to pay it off, you would probably want to wait until the end of the current mortgage (depending on lots of different factors, of course).
- emodendroket 9y ago
  OK, got it. Frankly, it seems like a system that makes owning a home less attractive, but I suppose US policy has been driven by the idea that home ownership should be encouraged.
  - goodcanadian 9y ago
    Other differences: Canada does not have a mortgage interest tax deduction nor does it have low/no down payment mortgage options. Generally, the more conservative approach to banking makes things more sane and is part of the reason that Canada rode out the global financial crisis relatively unscathed.
    - emodendroket 9y ago
      Well, it also makes people less likely to own homes, and I'm not really convinced you couldn't have a relatively cautious system that still had long, federally backed mortgage terms or tax deductions or even relatively low down payment options. The big crash was preceded by lots of outright fraud.
      - goodcanadian 9y ago
        I got curious, so I did a google search. It appears that the home ownership rate is very similar between Canada and the US. At the moment, it is higher in Canada as the US is still recovering from the effects of the mortgage crisis. That said, I don't disagree with you. The US has made a policy of promoting home ownership, more so than other countries. That has potentially come with adverse side effects. On the other hand, Canada's relative banking conservatism has arguably prevented Canada's own housing bubble from bursting which could be, itself, a bad thing.
        emodendroket 9y ago
        I wouldn't have guessed the rates would be similar. That's interesting.
  - deleted 9y ago
    [deleted]
  - sliverstorm 9y ago
    It doesn't seem like there's anything radical about a standard, simple interest, fixed rate loan with no balloon payment. Setting aside questions of rate and term, your typical USA 20% down 30 year fixed mortgage is about as simple/ordinary/traditional as loans get. Which makes me think it's not really any special favoritism in the US...

srhngpr 9y ago

Love the tool to help visualize; however, you need to allow mortgage period to be up to 30 years. CHMC insured mortgages (if you put anything less than 20% down payment have a maximum of 25 years); however, many banks offer up to 30 years. As an example, see the TD Bank mortgage calculator: https://tools.td.com/mortgage-payment-calculator/ https://tools.td.com/mortgage-payment-calculator/