Canadian Mortgage Lessons for America

I just read a great analaysis by the Financial Times by Robert Pozen of the key differences between the Canadian and US housing markets.

Pozen gets into the three main differences between the two systems, which he contends are the largest reasons why the Canadian real estate market has stayed relatively strong when compared to the utter collapse of real estate markets in many US States.

The three biggest differences, according to Pozen are as follows:

1. Canadian lenders require at least 5% down, and often more, in order to purchase a home. (I guess nobody told him that lenders and insurers were endorsing 0% down financing for a period of time)

2. The homeowner is held responsible if they default in Canada. That is, if the house gets foreclosed on at a loss compared to the loan amount, the home owner needs to make up the difference. That’s a huge incentive not to just “hand in the keys”.

3. In Canada you can’t just magically get a tax deduction on the interest you pay on your principal residence. You can deduct interest if it’s used for investments, but most Canadians don’t take advantage of things like the Smith Manouevre. The author suggests that, by making interest deductible on all mortgages in the States, that home owners were treating their properties as giant ATMs.

Here is the full article about Canadian and American mortgage policy differences