Garry Marr: Why U.s. 30-year Mortgage Contracts Are A Mixed Blessing For Homeowners

Canadians renewing their mortgages this year might wish they were part of the American system that locks rates in for 30 years. But as the saying goes, be careful what you wish for.

About 60 per cent of Canadians with mortgages were expected to renew in 2025 and 2026, about one third of them at higher rates .

Five-year mortgage rates that fell below 1.5 per cent a half decade ago were the deal of a lifetime, and not surprisingly, Canadians took advantage.

Meanwhile, Americans who locked into mortgages at the bottom of the market continue to enjoy rates that dipped below three per cent for a 30-year fixed mortgage , according to the Federal Reserve Bank of St. Louis. Today, the average 30-year mortgage in the U.S. is 6.95 per cent.

The hidden downside south of the border is the “lock-in effect,” in which few consumers are willing to sell their homes because they cannot port their super-low mortgage rates to another property , according to a former U.S. federal housing commissioner.

“The housing market is a little stalled right now,” said Frank Cassidy, now a senior director of Walker & Dunlop, one of the largest commercial real estate finance and advisory services firms in the United States.

He said Americans historically financed mortgages that way because the government backed the loans and consumers wanted the safety of the rate hold.

It’s important to remember that while Canadians may amortize their loans over 25 or even 30 years, making payments palatable because they are spread out as if you will hold the debt that long, the most popular mortgage term is typically five years, which ultimately leaves you dependent on the bank renewing your loan.

Mortgage renewals have mostly been a given in Canada for decades, even if rates change, as we are seeing today. But if your house has dropped in value and and is now worth less than the amount remaining on your mortgage, those renewals may no longer be so automatic.

It’s not that Americans don’t pay a price for this rate security: the 30-year mortgage can easily be one percentage point higher than the Canadian five-year mortgage. And with the mortgage being tied to the property, the cost of moving can become punishing.

“A lot of people will just keep their property and rent it,” said Cassidy, about what happens if you want to move for something like a job. “I have multiple rental properties and mortgages between two and three per cent, and that’s why I have kept them.”

Cassidy said that although American homeowners cannot port their mortgage to a new property, they can sell their home with the existing mortgage and rate. The problem is that rising home prices over the years mean any buyer would need a second mortgage or more equity to cover the gap, complicating any sale.

Cassidy said he thinks the answer in the U.S. is to “unclog” the market by focusing on supply-side initiatives, something that would reduce prices.

Before we get arrogant about Canadian housing policy, let’s remember sales aren’t exploding here either. Across the country, August sales were down 6.9 per cent from a year ago, according to the Canadian Real Estate Association. New home construction is down almost five per cent from a year ago for the first eight months of the year, according to Canada Mortgage and Housing Corp.

Jason Mercer, chief economist with the Toronto Regional Real Estate Board, doesn’t endorse either system but says both have just evolved in their own way over decades, and now it’s just convention.

“Some of this is linked back to how the mortgages are funded,” said Mercer, adding that the sale of five-year bonds is more common here.

He also pointed out other factors that move the markets, such as interest-rate deductibility in the United States and the absence of capital gains tax on the sale of a principal residence in Canada.

Canadians also have shown almost no appetite for longer fixed-term mortgages, with low demand for 10-year fixed-rate mortgages, which can easily be a percentage point higher than five-year terms.

“You can’t have both. You can’t have flexibility and rate certainty, and they kind of conflict,” said Stillman, noting Americans cannot refinance properties without losing the exiting rate, something no one wants to do when rates are rising.

“When rates were at two or three per cent (in the United States), it was a great thing. Everybody (in Canada) should have taken a 10-year mortgage at 2.5 per cent.”

But he was also writing five-year mortgages as low as 1.35 per cent at the bottom of the market.

“Nobody ever did it because everybody was super-focused on how much house I can buy and what’s my lowest payment. We got suckered into it and told rates would stay low for a long time,” said Stillman, pointing fingers at former prime minister Justin Trudeau and the Bank of Canada for sending out that message.

Ron Butler, a mortgage broker, said lower house prices in the United States can spur home ownership in spite of higher rates, but also noted Americans can jump into a loan knowing they can walk away from their mortgage.

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“You just hand the keys to the bank, and they cannot chase you,” he said, something not the case in the crumbling Canadian condo market. “Why are all these people who bought pre-construction condos who lost 40 per cent closing? They know the builder will chase me. They will force me into bankruptcy.”

Butler said the share of 10-year mortgages is less than one per cent, and he chalks that up to most Canadians living through a constant housing boom with a few exceptions.

The U.S. system provides stability when rates are low, but it limits market growth because you are stuck, especially if prices go down, said Stillman.

“It just limits choice, limits freedom,” said Stillman. “What term is … long enough that it gives you stability, but it’s short enough that you don’t feel handcuffed?”

• Email: gmarr@postmedia.com