Canada may keep a low profile, but it is one of the wealthiest countries in the world with the eighth-highest per capita income in the world and a high ranking by the Human Development Index for quality of life, government regulation, civil rights and economic freedom. Canada is also home to some beautiful attractions, such as gorgeous mountain ranges, breathtaking waterfalls, sprawling vineyards and more. Some of the largest cities in the world are also in Canada.
With its diverse landscape and culture, as well as its high quality of life, Canada is an attractive destination for investors looking to purchase a vacation home or a rental property. However, U.S. buyers may not be prepared for some of the differences they will find in the Canadian real estate market.
Outside of a couple hot markets like Vancouver and Toronto, the Canadian housing market has been considered exceptionally stable in recent decades. When Vancouver and Toronto real estate prices dramatically inflated other parts of the country remained quite affordable.
This stability is due in large part to some of the standards that set it apart from the American housing market.
More than half of all borrowers carry some kind of mortgage insurance (as opposed to about 30 percent of U.S. homeowners), and they carry it for the full life of the loan. The insurance isn’t canceled once equity accrues, like with private mortgage insurance in the United States, which is typically canceled once the loan value drops below 80 percent of the value of the home. Therefore, lenders are protected in case the borrower defaults.
Make Sure You Can Afford Your Loan Payments!
Perhaps one reason why so many homeowners carry mortgage insurance is that they are fully responsible for the loan, even if they default. Even if homes are foreclosed, lenders may still come after borrowers for their assets or even to garnish their wages to satisfy the debt. CMHC mortgage insurance is required for all loans with less than 20% downpayment. Loans which require insurance can only be insured for up to a 25-year amortization schedule.
|CMHC Mortgage Insurance Fees
|5% to 9.99%
|4% of loan
|10% to 14.99%
|3.1% of loan
|15% to 19.99%
|2.8% of loan
On July 1st, 2020 the CMHC coverage policies added the following requirements:
The way loans are structured differs, as well. Most Canadian mortgages are issued for a fixed rate for five years. After that term, the loan is re-negotiated for another five years, with loans typically using a 25-year amortization schedule. In the United States home-buyers can obtain fixed-rate loans where rates are locked for the entire 30-year term.
In Canada mortgage interest is compounded semi-annually, rather than once a month, and it is charged at the end of the month, not the beginning.
Mortgage interest is not tax-deductible, but homeowners also don’t have to pay taxes on capital gains when they sell their homes. Anyone who tries to pre-pay their mortgage will have to pay a stiff penalty.
In Canada home buyers are required to put down a minimum downpayment on a home purchase. The minimum amount depends on the price of the home, with a higher percent down required on more expensive homes. The following table shows qualification requirements:
|Minimum Down Payment
|$0 to $499,999
|5% of home value
|$500,000 to $999,999
|5% of first $500,000 & 10% for any amount above that
|20% of the home's sale price
Any mortgage with a term beyond 25 years can not be insured, thus longer duration loans require a 20% down payment.
In the United States there are concepts called the front-end debt ratio and back-end debt ratio which compare the homebuyer's income against their monthly housing expenses and their total debt service expenses.
Front-End Ratio: this figure compares your housing cost to your total monthly income. It covers mortgage principal & interest payments, property taxes, PMI, homeowner's insurance & HOA. These costs are often called PITI.
Back-End Ratio: this figures everything included in your front-end ratio as well as your other monthly payments servicing your mandatory debt obligations.
In Canada there are similar concepts to DTI where the Canada Mortage and Housing Corporation (CMHC) sets limits to protect homeowners from loans they are unlikely to afford paying. They ensure that both the housing and total cost of managing all debts with housing payments do not exceed practical levels.
What is Gross Debt Service Ratio?
GDS is similar to the front-end ratio in the U.S. except it also includes your heating expenses and the condo dues (which are similar to HOA fees in the US) only count at 50%. In Canada the inclusion of heating expenses changes the accronym PITI to PITH. Add up those housing expenses and divide those by your monthly pre-tax income. A GDS of 32% or below is considered good. The GDS formula is published below.
GDS = 100 * (P + I + H + (C/2)) / I
What is Total Debt Service Ratio?
TDS includes your GDS along with your other monthly debt payments including credit cards, auto loans, and other loan expenses. A TDS of 40% or below is considered good. The TDS formula is published below.
TDS = 100 * (P + I + H + (C/2) + D1 + D2 ... Dn) / I
What are the GDS & TDS Limits?
Industry sandards for GDS and TDS are 32% & 40%. CMHC itself will not insure above 35%/42%.
Are the GDS & TDS Limits Hard Limits?
While industry sandards for GDS and TDS are 32% & 40%, these are not hard limits. Borrowers with great credit score can exceed the GDS/TDS limits stated by CMHC up to 39%/44% and still get insured by GenWorth Financial or Canada Guarantee. CMHC itself will not insure above 35%/42%.
Since mortgage interest is compounded differently, your payments will not be the same as they would for the same loan terms in the United States. In most cases, you will actually pay slightly less due to interest compounding only twice annually.
For example, if you buy a $250,000 home with a $200,000 loan at a 5 percent interest rate, you can expect to pay $1,067.38 in principle and interest every month. For the same loan terms in the United States, you can expect to pay $1,073.64 in principle and interest.
By using the above calculator, you can determine your financial obligations for buying a home in Canada so that you can make the right financial plan to meet your personal investing goals.
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