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> if there's a huge balloon payment owed at the end, then the Canadian "homeowner" still owes a large amount after 25 or 30 years. So perhaps the next loan is f

> if there's a huge balloon payment owed at the end, then the Canadian "homeowner" still owes a large amount after 25 or 30 years. So perhaps the next loan is for less, but still a significant amount. In the US, most people do complete their 30 year mortgage and the home really is paid off, although they continue to owe property tax. There's no difference. A (first-time) Canadian homebuyer will typically take out a mortgage with an effective 25y amortization term over a 5y locked-in rate. At the end of the 5y, the homeowner who doesn't move will typically "renew" their mortgage for a 20y amortization term at the then-prevailing 5y fixed rate. If rates remain constant, then their monthly payment will be essentially unchanged. A (first-time) American homebuyer will typically take out a 30y fixed mortgage, with a 30y fixed rate and a 30y amortization period. At the end of 5 years, there is no paperwork to fill out but the mortgage will now have 25y left on its amortization, and the monthly payments will be unchanged. The main difference is that the US mortgage has a great deal of optionality built-in. An American homeowner can typically prepay the mortgage at any time without penalty, and the most common reasons to do so are to move or to refinance when rates are lower. The Canadian homeowner typically faces a prepayment penalty if they try to refinance before the end of their term.

listenallyall 4y ago
I'm not trying to argue with you, I admit I don't know and am just trying to understand. The OP wrote: for nearly all of the term of a Canadian mortgage, your monthly payment is much lower than the numbers calculated above So how can a Canadian mortgage (or series of them in 5 year increments) be paid off in 30 years just like a US mortgage, if the monthly payments are much less each month?
- Majromax 4y ago
  > So how can a Canadian mortgage (or series of them in 5 year increments) be paid off in 30 years just like a US mortgage, if the monthly payments are much less each month? When you presented your US numbers above, your "X year US mortgage" both fixed the interest rate for X years and set the amortization period as X years. Canadian mortgages don't do that. Canadian mortgages fix the interest rate for X years, but the payments are set for a Y-year amortization schedule (Y>X). If you go to a US banker and ask for a 5-year mortgage, they'll think you want your house paid off entirely at the end of 5 years, and you'll pay a hefty portion of the principal each month. If you walk into a Canadian bank with the same request, they'll be happy to quote you 5-year mortgages with an arbitrary amortization period in the 5-25 year range.
- papercrane 4y ago
  The typical Canadian mortgage would have a smaller monthly payment because they've locked in a lower interest rate for 5 years, instead of 30 years. For example, it looks like right now (just a quick Google, so maybe these are off) a 30y rate in the US is about 5.2%, while in Canada you'd be able to get around 3.9%. If the rates where the same then the payments would be the same. Although 30y mortgages are atypical in Canada, 25 year amortization is the norm here. The risk for the Canadian borrower is that rates might go up significantly in 5 years, while the American lender is taking the risk that rates might go up significantly and they've got capital locked up at lower rates then what they could get.
  - dragonwriter 4y ago
    > The typical Canadian mortgage would have a smaller monthly payment because they've locked in a lower interest rate for 5 years, instead of 30 years. The US has variable rate mortgages that are only fixed for, say, 5 years, but even when the minimum rate is capped just below the initial rate, they have only slightly lower initial rates than 30-year fixed rate mortgages , because while fixed rate mortgages price in interest rate risk, variable rate mortgages price in default risk (which is increased by the transfer of interest rate risk to the borrower.) > For example, it looks like right now (just a quick Google, so maybe these are off) a 30y rate in the use is about 5.2%, while in Canada you'd be able to get around 3.9% That's likely due to differences between Canadian and US markets other than the term for which rates are fixed, since 5/1 ARMs in the US, which aside from the interest rate lock are offered in a comparable market to US 30-year fixed mortgages, are currently at 5.04% national average.
  - listenallyall 4y ago
    That makes more sense. The OP talking about lower monthlies combined with a balloon payment and then people moving at the end of the term, strongly implies deferring principal such that it never actually gets paid off. Further, the OP made it sound like a lower monthly payment is a given. In fact, as you note, that's only true when rates are not rising. The OP (and lots of homeowners, apparently) is going to be in for a surprise as the most recent cohort of Canadian 5-year mortgages come due and get refinanced at current rates. Those payments will no longer be lower than the US equivalent who locked in a 30-year fixed rate between 2017-2021. Thanks for the (much better) explanation.

listenallyall 4y ago

I'm not trying to argue with you, I admit I don't know and am just trying to understand. The OP wrote: for nearly all of the term of a Canadian mortgage, your monthly payment is much lower than the numbers calculated above So how can a Canadian mortgage (or series of them in 5 year increments) be paid off in 30 years just like a US mortgage, if the monthly payments are much less each month?

Majromax 4y ago
> So how can a Canadian mortgage (or series of them in 5 year increments) be paid off in 30 years just like a US mortgage, if the monthly payments are much less each month? When you presented your US numbers above, your "X year US mortgage" both fixed the interest rate for X years and set the amortization period as X years. Canadian mortgages don't do that. Canadian mortgages fix the interest rate for X years, but the payments are set for a Y-year amortization schedule (Y>X). If you go to a US banker and ask for a 5-year mortgage, they'll think you want your house paid off entirely at the end of 5 years, and you'll pay a hefty portion of the principal each month. If you walk into a Canadian bank with the same request, they'll be happy to quote you 5-year mortgages with an arbitrary amortization period in the 5-25 year range.
papercrane 4y ago
The typical Canadian mortgage would have a smaller monthly payment because they've locked in a lower interest rate for 5 years, instead of 30 years. For example, it looks like right now (just a quick Google, so maybe these are off) a 30y rate in the US is about 5.2%, while in Canada you'd be able to get around 3.9%. If the rates where the same then the payments would be the same. Although 30y mortgages are atypical in Canada, 25 year amortization is the norm here. The risk for the Canadian borrower is that rates might go up significantly in 5 years, while the American lender is taking the risk that rates might go up significantly and they've got capital locked up at lower rates then what they could get.
- dragonwriter 4y ago
  > The typical Canadian mortgage would have a smaller monthly payment because they've locked in a lower interest rate for 5 years, instead of 30 years. The US has variable rate mortgages that are only fixed for, say, 5 years, but even when the minimum rate is capped just below the initial rate, they have only slightly lower initial rates than 30-year fixed rate mortgages , because while fixed rate mortgages price in interest rate risk, variable rate mortgages price in default risk (which is increased by the transfer of interest rate risk to the borrower.) > For example, it looks like right now (just a quick Google, so maybe these are off) a 30y rate in the use is about 5.2%, while in Canada you'd be able to get around 3.9% That's likely due to differences between Canadian and US markets other than the term for which rates are fixed, since 5/1 ARMs in the US, which aside from the interest rate lock are offered in a comparable market to US 30-year fixed mortgages, are currently at 5.04% national average.
- listenallyall 4y ago
  That makes more sense. The OP talking about lower monthlies combined with a balloon payment and then people moving at the end of the term, strongly implies deferring principal such that it never actually gets paid off. Further, the OP made it sound like a lower monthly payment is a given. In fact, as you note, that's only true when rates are not rising. The OP (and lots of homeowners, apparently) is going to be in for a surprise as the most recent cohort of Canadian 5-year mortgages come due and get refinanced at current rates. Those payments will no longer be lower than the US equivalent who locked in a 30-year fixed rate between 2017-2021. Thanks for the (much better) explanation.