In the current environment in the US, a 5/1 ARM is only 25-30 bps better than a 30 year fixed, and about 10-15 bps worse than a 15y fixed, so the interest benefit isn’t that great (if at all). Taking a look at forward LIBOR rates, 5 years from now, rates will go from 0.50% to 1.88%. Add this to the 2.25% margin that’s part of the ARM loan and your expected rate will be 4.13% (w/ APR being higher). Even w/ a 5% cap on the ARM APR, you’re going to pay more (assuming implied forward rates remain equal). On a $200k loan, this ends up being $30k more in interest for the ARM over the life of the loan.
Now, consider you’re anyone outside of this forum, what’s easier? Doing that analysis? Or locking in a 30y fixed rate at historic lows and knowing your monthly payments so you can manage your budget more efficiently?
the great depression probably had something to do with it. it made our grandparents very very conservative – like my mom and her brothers would get a bath 1x per week (using the same water between the 4 of them) to save water. that rubbed off on the boomers. my parents would never consider anything but a 30 yr fixed.
-Prepayment penalties in Canada. -Recourse loans in Canada. Not even allowed in some US states. -Portability in Canada -And, the Canadian government incentivizes banks to keep the loans on their books. Funding comes from short term deposits. Close thread.
-Prepayment penalties in Canada. you have no prepayment restrictions in the U.S.?
-Recourse loans in Canada. Not even allowed in some US states. not sure how this would have a major impact.
-Portability in Canada. this point actually should result in the opposite. americans should opt for shorter terms b/c of a lack of portability.
-And, the Canadian government incentivizes banks to keep the loans on their books. Funding comes from short term deposits. this isn’t the case in the U.S.? how are mortgages not on the books of U.S. banks? isn’t that what caused the 2008 crisis?
the great depression happened everywhere though. you’d figure the brits would come out more conservative after experiencing the great depression followed-up by Nazi bombing raids in their capital city.
typical restrictions are: you can pay 20% of the mortgage, on top of monthly payments, in any given year, and you can increase your monthly payment by up to 20% at any time. so if you did have a 30 year mortgage, you could essentially pay if off in 4 years if you had the money to do so without penalties, less than the typical mortgage term anyway.
if you want to pay the whole mortgage today, you either pay a penalty of 3% of the mortgage balance or the expected value of interest savings considering current rates and your mortgage rate, depending on the mortgage you signed on for.
these rules are certaintly not enough to deter canadians from going 15/30 if we were so inclined.
Prepayment really comes into play during refis more so than someone just wanting to pay off their mortgage early. It essentially allows an adjustable rate to the downside, with a ceiling on the upside. You’ll pay new loan origination fees, but many people went from 7% to 5% to 3.5% in the last 10 years.
OK, if there is little refinance cost then I understand the desire to go with 15/30. It’s still a poor decision for most, but it is understandable at least.
Portability means you’re stuck with the mortgage even if you sell prior to term, unless you pay penalities, no? Without portability, prepayment penalties would be a hard sell. Risk of foreclosure and falling property values is higher when rates are rising. If the banks can come after you, as well as your house, the ARM is more palatable to the bank than under non-recourse.
i think this has been much more interesting and enlightening than the inconvenient truth.
i just learned most of the differences between US and Canadian mortgages in a day and not really trying.
there are still some unexplained questions but i think we can chalk it up to “that’s the the way it is for whatever reason”, but its most likely the banks offering what they want for their own selfish reasons.
Another interesting tidbit is US mortgage defaults approached five %. Canadian defaults haven’t broken 0.5% in recent history. That’s from memory, so please correct if off base. But not nearly as interesting as the carbon cycle and how most people don’t have a clue when it comes to how important abundant CO2 is to our very survival. Without man’s intervention, CO2 levels could have declined to 150 ppm in 2 million years. Then life perishes. Interesting, no?
If Americans understood the Canadian mortgage market, RY, CM, BNS, BMO, TD would not be the undervalued gold mines that they are. There is some risk in the Canadian real estate market, but next to none falls on the banks. It’s mostly risk to the taxpayer via CMHC.