Canada Avoiding Foreclosure Problem

Why the homeowners in Canada are less likely to confront foreclosure? Less than 1% of the mortgages in Canada are in arrears as compared to the 2.9M people that received the notices for foreclosure in US in year 2010. You might be thinking that the reason behind this is the lower number of Canadians and you would be right about it to some extent. The population of Canada is 34.4 million, whereas the population of US has now exceeded 307M. But the rates for foreclosure are 20% in highest hit states. Therefore, population doesn’t explain the whole difference.

Canada circumvented the housing bubble that was faced by both UK and USA. This is all due to the conservative banking practices adopted by Canada. Canada has strict underwriting principles and the banks in Canada sets aside more money for potential losses in case of downward turn by the market. Banks are not alone in conservative in lending but also, the private mortgage insures now have more control over the approval of the mortgage. Any Canadian who pays less than 20% down payment on house has to pay full fee of mortgage insurance upfront, furthermore, the private mortgage insurance company has the right to approve or even reject appraisal of the property. This in return allows the buyers and banks to get the realistic property appraisals.

In Canada, when people try to apply for the house mortgages, they are confronted with different choices of mortgages. Most of the mortgages are for the period of 5 years and the rate of interest is readjusted to the current rate of interest after every 5 years. This in result encourages people to pay off the mortgages even faster. Also, there are penalties for the prepayments which discourage the refinancing practice. Another big difference between US and Canada is that the Canadians don’t get any kind of tax deduction for their mortgage interest, and so, they haven’t got any incentive to keep on paying mortgage. 

In Canada, you cannot just walk away if you have got a mortgage.  Canada has full option on your mortgage that even if the bank has foreclosed on your home; you must have to pay the mortgage. If the house has less worth than the mortgage after the bank forecloses, then the bank has the right to sue you for deficiency judgment. In Canada, the low-income groups are discouraged to take the home ownership. In place of that, the government of Canada provides public funding for the low-income rental housing. If we talk about reality, then we can say that there is not much difference between rules for home financing in Canada and the rules that led US to the housing bubble. Before the booming years, banks used to require information in order to prove the income and set strict income standards. Also, banks used to hold appraisers to a higher scrutiny. This is what the Banks in Canada continued to practice, whereas the UK and US Banks lowered their underwriting standards.