Just because you can qualify for a big mortgage doesn’t mean you should – Huffington Post

Jeff Evans

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.

BMO brings back the 2.99% mortgage

Jeff Evans

On the Globe and Mail website is a story about the Bank of Montreal (BMO) lowering their 5 year fixed rate to 2.99%. From the article:

Bank of Montreal has once again lowered its five-year fixed mortgage rate to 2.99 per cent, from 3.29 per cent, a move that could cause more downward pressure on rates at a time when they’re already defying expectations.

BMO’s rate is not the lowest in the market, but it is the lowest that’s currently available from the country’s biggest banks. BMO sparked a mortgage price war among the banks when it first introduced its 2.99 per cent five-year-fixed rate in early 2012. That rate also earned the bank a lecture from then-Finance Minister Jim Flaherty, who had been taking steps to curb growth in the housing market amid fears that a bubble could be forming. BMO has repeatedly brought the rate back since then, most recently this March.

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Housing starts down in August – CMHC

Jeff Evans

Housing starts dropped from July to August, according to CMHC. From CTV News:

he annual pace of housing starts in Canada slowed in August to 192,368 units, down from 199,813 in July, according to the Canada Mortgage and Housing Corp.

The pace fell short of the 195,000 units forecast by analysts.

“The Bank of Canada may be looking for a rotation away from housing and the consumer, but low rates continue to support residential investment,” CIBC economist Nick Exarhos said in a report.

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