Specifics of Canadian mortgage and other metrics?

Question

Hi everyone,

we decided to add specific calculations for Canadian investors to our property analysis tool. Are there any investors here familiar with the Canadian market?

So far we are working on the Canadian mortgage calculation (see: http://www.amortization.com/faq.htm#2 ). Is there something else what investors from Canada calculate differently than we do here?

Thanks!

Mindy Jensen · Answer

Thanks for the heads up, @Roy N. We're looking into it and hopefully by the time you read this, it will be fixed.

Roy N. · Answer

Commercial lending:

Commercial lending is quite similar in both our countries.

Residential lending:

When financing a residential property (1 - 4 units) with a public lender you have a choice to place either:

• a conventional / low-ratio mortgage - A downpayment of 20% (or more) is made (LTV "less than or equal to" 80%); or
• a high-ratio mortgage - downpayment of "less than" 20% is made (80% "less than" LTV "less than or equal to" 95%).

Non-owner-occupied properties are to be financed with a downpayment of 20% (or more).  All high-ratio mortgages must be insured, either via CMHC or one of the two private insurers.

Similarly there are two sets of guidelines for qualification:

High-ratio borrowers :

• Mortgage qualification is based upon the Bank of Canada Benchmark 5-year Conventional Mortgage Rate (V122521) - which is presently 4.64% [Note: This is also known as the mortgage qualifying rate];
• Maximum amortization is 25-years;
• maximum purchase price or "as improved" property value must be "less than" $1,000,000;
• borrower's gross debt service (GDS) "less than or equal to" 39% (CMHC prefers "less than or equal to" 32%);
• borrower's total debt service (TDS) "less than or equal to" 44% (CMHC prefers "less than or equal to" 40%); and
• property must be owner-occupied.

Low-ratio borrowers:

If the lender bulk-insures their portfolio, they must qualify applicants using the the same rules as above.  If the lender does not insure their portfolio, they may still qualify the borrower at their posted  5-year discount rate rather than the BoC Benchmark and allow up to a 35-year amortization (this may have been recently reduced to 30-years).  That said, many lenders appear to be applying the above qualification rules across their residential lending practice.  Similarly, many lenders are no longer {readily} offering 30-yr amortizations on residential financing.

Mortgage terms

In Canada, residential mortgage terms range from as short as 6-months to as long as 10-years with the most common term being 5-years.

[Note: There appears to be a defect in the parser for the forum which prohibits one from using the mathematical symbols for "less than" or "greater than" in {HTML} formatted text such as bullet lists. @Mindy Jensen]

John K. · Answer

@Roy

Thanks so much for the reply. I see that there are quite a few extra options with the Canadian mortgage. In my property analysis tool, we don't really calculate with mortgage insurance and it's also quite impossible to somehow predict the variable interest rate for the future years.

I will concentrate mainly on the residential fixed rate mortgage. You mentioned that the applicant must qualify for mortgage with amortization of 25 years, but then he/she can choose the actual terms and shorter or longer amortization?

And you are saying that for commercial real estate mortgage, there would be monthly compounding, not the semi-annual?

Roy N. · Answer

@John K.

Your descriptions are not entirely accurate.  Interest is compounded semi-annually, not in advance, but only on residential financing and then, not on all product types. There are variable rate mortgage products which compound interest monthly.

Where high-ratio lending is involved, mortgage insurance is calculated and applied differently than in the U.S.A.

Where residential mortgages are concerned, an applicant must qualify for a mortgage as though s/he were placing a 5-year term, fixed rate mortgage with an amortization of 25yrs, regardless of the actual financing terms being used.

The Interest Rate Differential (IRD) is assessed on early payout/prepayment of closed, fixed-rate mortgages.   Early prepayment of closed, variable rate mortgage notes are typically assessed 3-months interest.  Open, variable rate mortgages have no prepayment penalty.

"How much can I save by paying my mortgage weekly instead of monthly?"

As with any loan, you will save by more frequent mortgage payments over the default of monthly.  However, while most Canadians stick with the default, monthly mortgage payment, the next most common shift, and that which offers the most easily accessibly savings, is a move to accelerated bi-weekly payments (half a monthly payment made every two weeks -> earlier payment of principal, plus an extra {monthly} payment each year).

While you will save additional interest costs with a further increase to weekly (or accelerated weekly) payments, they are not common.