I came across an interesting article in the Huffington Post today about people borrowing up to the limits of their qualification to buy a home. From the article:
A homeowner who files bankruptcy typically has a mortgage equal to 95 per cent of the value of their house. For consumer proposal filers the number is 91 per cent, so 90 per cent appears to be the magic number. Hold a mortgage above that threshold and you are at significant risk of filing for insolvency.
This is an interesting statistic. Most of the people who file bankruptcy or consumer proposals are on average at about 95% of the value of their homes. I think this is understandable as those with more than 20% equity can pull it out via a refinance, which the government has now disallowed for any higher loan-to-value. I do think that it does only tell half of the story though.
High ratio mortgages profitable for insurers
The news has this year reported about how mortgage insurer Genworth has reported increased profits in Q2 of this year. As such, while the loan to value of properties owned by bankrupts is high, the question I think of is what percentage of people who apply for 90%+ mortgages end up declaring bankruptcy? I don’t know the answer to this, but if Genworth’s profitability is an indication, the percentage must be quite low. If it wasn’t, there wouldn’t be much of a business case for offering 95% loan to value mortgages, or they would increase the rate premiums. These companies are experts at assessing risk.
To those looking at buying a home with 5% down payment, I would agree with the sentiment to not use the highest pre-approval as the guideline for what you can afford. However, in a market like Vancouver, the cost of housing is such that it may not be possible to get something within your needs with a budget you are comfortable with. Luckily, mortgage rates remain at historic lows. However, I think it could also be said that the economy hasn’t been excellent for the time interest rates will be low, and so when interest rates go up eventually, it will be a result of an economy that is thriving, and that could offset the increase in rates on a macroeconomic level.
While I agree with the sentiment the article, for home buyers to buy something they are comfortable with affording, based on my points above, I would also say that many people buy with 5% down and do not go bankrupt, and the ones who do possibly have other factors in their lives that led them to that point. Poor financial management, high interest unsecured credit, life events, etc. could all be additional or primary factors in the bankruptcies.