Ever wondered why Americans can lock in a mortgage rate for 30 years while Canadians are stuck renewing every few years? The answer lies in fundamentally different banking systems, government policies, and risk management approaches.
Canadian vs. U.S Mortgages
While the 30-year, fixed-rate mortgage has become a staple in the U.S., Canada doesn't offer anything remotely similar. The longest term for a home loan in the North Country is five years, with the amount amortized over a 25-year period. This isn't an oversight or market failure, it's the result of deliberate policy choices that prioritize financial system stability over borrower convenience.
Key Differences: Terms vs. Amortization
First, let's clarify the terminology. The mortgage term is the time your mortgage contract is in effect. Terms may range from a few months to 5 years or more. At the end of each term, you'll need to renew your mortgage. The amortization period is how long it takes to pay off the entire loan—typically 25 or 30 years in Canada.
So when Canadians say they have a "25-year mortgage," they mean a 25-year amortization with multiple 5-year terms. Americans with a "30-year mortgage" have both a 30-year term AND a 30-year amortization, the rate stays locked for the entire period.
The Four Fundamental Reasons why Canada doesn't Have 30-year Fixed Rates
1. Different Banking Models: Deposits vs. Securitization
Canada: The reason why a 30-year mortgage does not exist in Canada is because most banks hold them on their balance sheet. Most of their liabilities go out to five years, they don't go out to 25 or 30 years. As a result, they don't love long-dated mortgages because it creates the mismatch between the loans and the deposits that can be unbelievably risky.
Canadian banks fund mortgages primarily through customer deposits, which are typically short-term (savings accounts, GICs, etc.). Offering a 30-year fixed mortgage while funding it with 5-year deposits creates massive interest rate risk.
United States: Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. They purchase mortgages that meet certain standards from banks and other originators, pool those loans into mortgage-backed securities that they guarantee against losses from defaults on the underlying mortgages, and sell the securities to investors—a process referred to as securitization.
This securitization model transfers the long-term interest rate risk from banks to investors and government-sponsored enterprises.
2. Government Policy Objectives
The difference in mortgage markets between the U.S. and Canada seem to stem mainly from this issue: The U.S. openly supports homeownership, whereas Canada freely admits that it does not, at least not more than other types of housing, such as rentals and transitional housing.
United States: The federal government created Fannie Mae in 1938 and Freddie Mac in 1970 specifically to promote homeownership by providing liquidity to mortgage markets. Congress established GSEs to improve the efficiency of capital markets and to overcome market imperfections which prevent funds from moving easily from suppliers of funds to areas of high loan demand.
Canada: Canadian housing policy focuses on overall housing supply and affordability rather than specifically promoting homeownership through mortgage subsidies.
3. Risk Management Philosophy
Canadian approach: The Canadian system, however, isn't onerous and affords stability to the entire housing market, as well as the financial system. Making short-term loans enables banks to lend from their own deposits, and Canadian banks are encouraged to keep loans on their own balance sheets.
This keeps risk concentrated with the originating institution, encouraging careful underwriting.
US approach: Unlike Canadian banks, US banks don't hold most of the mortgages they write on their balance sheet. This is a feature of the US market that is generally thought to have contributed to the mortgage meltdown in 2008. Since US lenders didn't retain the mortgages they wrote, they had less incentive to maintain good underwriting standards.
4. Regulatory Structure and Interest Rate Risk
If you're a lender or a mortgage investor, it might not sound quite as good. The interest rate risk has shifted from the borrower to you. And we saw a few US banks fail in recent years when they mismanaged their interest rate risk.
Canada's approach: Shorter terms mean borrowers absorb interest rate risk through periodic renewals, but this provides banks with predictable funding costs and protects the financial system from rate mismatches.
US approach: The 30-year mortgage has been a feature in the United States for a long time, though, so banks have had plenty of time to adapt their risk management and the vast majority do a good job. However, this required extensive government support through GSEs.
The Cost of Each System
Canadian System Costs:
- For borrowers: Rate uncertainty every 5 years, potential payment shock during renewals
- Recent example: A quick calculation using current interest rates and the average mortgage size in Canada shows that a borrower who stretches their amortization from 25 to 30 years can reduce their payment by $200 per month. But they will pay their lender an additional $50,000 in interest costs over the life of their mortgage.
US System Costs:
- For taxpayers: Government backing of $8.5+ trillion in mortgages through GSEs
- For the financial system: Concentrated risk in government-sponsored entities
- Higher rates: 30-year fixed rates typically price in a risk premium for the long-term rate lock
Could Canada Adopt the US 30-Year Mortgage Model?
Recent government interest suggests it's possible. The fall economic statement tabled on Monday included a short reference to the idea of making long-term mortgages more widely available in Canada... Under a section on "lowering the costs of homeownership," Ottawa said it was "examining the barriers" to making mortgages with terms of up to 30 years available.
However, significant challenges remain:
What Would Need to Change:
- Securitization infrastructure: Canada would need to develop GSE-like entities or expand CMHC's role
- Regulatory framework: For 30-year fixed mortgage terms to become viable in Canada, Kelly said several regulatory changes would be needed, particularly concerning refinancing and pre-payment options.
- Investor base: He also pointed out the importance of attracting enough investors willing to hold these longer-term mortgages, as Canada's major banks have traditionally favoured shorter-term loans.
- Prepayment penalties: There would be harsh early-exit penalties for people who break 30-year fixed mortgages early before five years, given how interest rate differential charges work.
The Reality Check:
Kelly believes that with buy-in from regulators and lenders, 30-year fixed mortgage terms could eventually be introduced in Canada... 'You couldn't do it overnight': 30-year fixed mortgages still a long shot.
Which System Is Better?
Neither system is inherently superior—they represent different trade-offs:
US System Advantages:
- Payment certainty for borrowers
- Protection from rising rates
- Supports homeownership accessibility
Canadian System Advantages:
- Financial system stability
- Lower taxpayer risk
- Banks retain skin in the game
- More responsive to rate changes
US System Risks:
- Taxpayer exposure through GSE guarantees
- Moral hazard in lending standards
- Concentration of risk in government entities
Canadian System Risks:
- Payment shock during renewals
- Limits housing affordability during high-rate periods
- Rate uncertainty for borrowers
The Bottom Line
Canada doesn't have 30-year fixed rates because it chose a different path, prioritizing financial system stability and limiting taxpayer risk over borrower rate certainty. The Canadian model keeps banks accountable by forcing them to hold mortgages on their balance sheets and fund them with matching-term deposits.
The US model transfers risk from borrowers to taxpayers and investors through extensive government backing. These government-sponsored enterprises provide more than $8.5 trillion in funding for the U.S. mortgage markets and financial institutions.
Both systems work, but they reflect fundamentally different philosophies about who should bear the risks of long-term lending: borrowers, banks, or taxpayers.
As Canada explores longer-term mortgages, it will need to decide whether it's willing to embrace more government backing of housing finance—and the taxpayer risks that come with it.
Additional Resources:
- Bank of Canada: Canada's mortgage market—A question of balance
- Government of Canada: Mortgage terms and amortization
- FHFA: About Fannie Mae & Freddie Mac
- Deeded: Explore closing your mortgage refinance or renewal, for Canadian homeowners
Unlock Your Seamless Closing Experience
Your Journey to a Worry-Free Closing Starts Here!
