Hacker News Reader

Comment by blobbers | Hacker News Reader

Informational note: The notion of fixed rate mortgages does not exist in Canada. You can lock in for about 5 years, but otherwise your mortgage rate floats with prime.

If prime rates rise, borrowers can be on the hook for large amounts of defaults as incomes fail to keep up with higher payments.

(canadian housing market exhibits higher sensitivity to interest rates)

View on HN

What you're describing is a fixed rate mortgage with a 5 year term. We may not allow 40 year terms, but that doesn't mean we don't allow fixed rate mortgages. After the term is up you can renegotiate a new fixed rate term if you want, or move your mortgage.

That said, fixed rate mortgages almost always cost you more in the long run, though a 5 year term is probably going to screw you less than a 25+ year term.

Oh my. We are arguing over semantics. In the US, a fixed rate mortgage typically has a term equal to its amortization schedule. I.E. your interest is fixed for 30 years. In Canada, there are things called "fixed rate mortgages" where the interest is fixed for the term of the mortgage, but I have never seen a term longer than 5 years (most are shorter). The mortgage is typically amortized over a period of no longer than 25 years. So, in Canada, you have to get a new mortgage every few years and you are at the mercy of interest rate changes.

This sounds like its both good and bad, depending on which side you're on. Tracking current interest rates helps keep the market liquid, something that many "hot" markets aren't (Bay Area).

A lot of people in the Bay Area got their 30y mortgages locked in at a fantastic (low) 3.x% in the last ~5y, and would be hesitant to give that up, even if they wanted to upgrade. Combined with with property taxes that are locked to inflation, means that a homeowner has an incentive not to sell, and buyers compete for limited inventory.

> but I have never seen a term longer than 5 years (most are shorter).

Five is pretty standard, but you can get longer if you want. RBC has seven year rates on their website, and if you ask you can get the full term of your mortgage. The rate is ridiculous though, for example, in April 2013 the RBC posted rate for a 25-year term was 8.75%. Obviously negotiable, but still a high starting point.

When I was financing our first home our mortgage broker said he only ever had one person get a 25-year term.

Source for the 25-year rate: http://business.financialpost.com/personal-finance/mortgages...

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/

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?

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).

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.

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.

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.

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.

I wouldn't have guessed the rates would be similar. That's interesting.

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...

It's my understanding (which I freely admit may be in whole or in part mistaken) that such loans didn't really exist until heavy political intervention/the creation of Fannie Mae.

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/

"The notion of fixed rate mortgages does not exist in Canada."

...

"You can lock in for about 5 years"

what?

In the US, the most standard "fixed rate" mortgage has the rate fixed for 30 years. A mortgage where the rate changes before loan maturity would be called an "adjustable rate mortgage" ("arm" for short).

Aren't we only talking about a difference in term length then? i.e. it's more common for the term length to equal the amortization length in the U.S.? In Canada even the amortization/maturity can't be greater than 25 years. And terms are commonly 5 years.

We can quibble about terminology but it sounds like a system wildly different from the US one, where most people have 30-year, fixed-rate mortgages.

Mortgages are typically longer than 5 years.

Exactly. In a US 30 year mortgage, it is reasonable to expect a borrower to pay it off. In a 5 year mortgage, you will typically refinance after 5 years (unless you hit the jackpot in the interim).

That sounds obnoxious, being forced to refinance 5 times. Why not a 30 year 5/5 ARM? (Rate adjusts every 5 years to market rate)

Reply on news.ycombinator.com