Much of the news Canadians are exposed to is focused on the US market. Mortgage rates are no different, and Canadian mortgage rates differ fundamentally to their American counterpart. US fixed mortgage rates are typically set for terms of 15, 20 or 30 years and the payments are set so that the mortgage will be completely paid off by the end of the term. US mortgage rates are thus tied to the amortization, so if you want a lower mortgage payment you need to take a longer term and higher mortgage rate.
Canadian mortgage rates are also tied to the term of the mortgage, but the amortization can be set independently. As a result, typical Canadian mortgage terms are between 1 and 5 years, with very few borrowers selecting terms of 10 years (the maximum term offered by most mortgage lenders). This feature enables a borrower to select a 1 year term, but have their payments set to pay-off the mortgage over 25 or even 30 years.
One of the principal reasons for this fundamental difference is that there are no pay-out penalties in the US system. When US mortgage rates drop, the US lending market experiences a refinance boom where borrowers refinance in droves to change lenders and take advantage of the new mortgage rates. Canadian mortgage rates are set for short terms, but significant pre-payment penalties can be levied if you try to pay out your mortgage before the end of the term.
There are advantages and disadvantages to both systems, but for Canadians it’s important to know how your mortgage works and not get confused by the US media. Canadian mortgage rates are easy to discern by the shorter terms and separate amortization options. If you are unsure if you are reading the right data, seek the advice of an accredited mortgage professional.