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Everything else is Cheaper in the States; are Mortgages, too?

2 April 2013

As Canadians, we’re used to paying more than Americans for certain goods. Magazines, books, clothing, and even chocolate bars are priced more expensive on this side of the border than our southern counterparts. But when it comes to mortgages, who pays more? Americans or Canadians?

At first glance, it does seem as though, once again, mortgages come cheaper in the United States. Looking long-term, the best deal you can get in Canada sits somewhere around 3.69 per cent for a fixed-rate term of 10 years. That seems like a great deal, but many major lenders don’t allow you to renegotiate or move your mortgage during that term. And if you do, doing so can cost you enormously in fees and penalties. Not to mention the fact that mortgage rules in Canada require borrowers to have a hefty 20 per cent down payment before they buy; and if they don’t, they need to take a mortgage amortized over 25 years – something that adds to the cost of that mortgage.

But, things are quite different in the United States.

Interest rates are not only lower in the States right now (still sitting at zero per cent while we talk about our super low rates of 1 per cent,) but they’re by nature very flexible. Home buyers can lock into that low rate and leave it locked in for a whopping 30 years if they want to. If they don’t on the other hand, they can refinance or move lenders with little to no penalties or fees incurred.

All of that being said, the initial interest charged on those mortgages is typically a bit higher than that zero per cent, just like you won’t be able to find a ten-year fixed in Canada for 1 per cent. Because American lenders take on more risk, knowing that their existing customers won’t pay any more if and when interest rates rise, they need to cover that risk and protect their future profits, too. Because of this, they’ll often charge much higher than that 0 per cent. But just how much?

Most American lenders will charge an additional 0.25 to 0.5 percentage point on all their mortgages right off the top. In addition to that, they do have the option to prepay without penalties, but they have to pay for that right upfront, with another 1 to 2 per cent being added to their mortgage.

So what’s the difference in the end?

Even with their additional fees that make mortgage packages in the States, American mortgages are typically cheaper than what you’ll find in Canada. However, they’re not as cheap as they may seem right upfront. Dig a little deeper and you’ll find that even though they may be cheaper overall in the U.S., Americans often still pay too much for their mortgages, too.

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