HawthorneVillager.com

A lot of people are going to be in for a nasty shock in 5 years when their rate has doubled (or tripled). I sure wouldn't be maxing out my limit right now at these rates, but I guess a lot of people don't think that far ahead. People seem to forget that in the early 80s, rates were around 20%, who knows if/when it will happen again, but too many people have come to believe the current rates are the new norm, rather than a short term anomaly.

Or people are buying large homes and stacking them with multiple families like my Brampton link.

No need to worry, when the rates go though the roof and you can't afford your payments Mattamy will be right there to buy the house back for 50 cents on the dollar.

_________________

They are qualifying people on the "posted rate" at 5 year fixed which I believe is still in the low/mid 5%s. This means your financials can support the house at that rate (although you'd likely need to give up some standard of living if you are barely approved). The mortgage is the last place people "don't pay".

Either way, to think the interest rate is going back to 9% over the next 10 years is fantasy. In fact, I don't see it moving past 5.25% within the decade.
On top of that, there is also a spread between the 5 year rate and the bond market that is much higher than in the past. You see, when the banks noticed that rates were getting so low, they refused to keep the spread where it was historically. So that's a little buffer as well.

My take = if we continue to employee people (as we are doing as a nation) there will not be any shocks that will have people losing their homes. I do see those at mid/late life buying big with big mortgages suffering in retirement. I also see the standard of living could go down (no more leased BMWs, no more Samsung Galaxy S4 on launch day, no more $300 Rogers Premium Plus Super HDTV PVR package) but people were qualified on their ability to pay for the house.

_________________

Looking for something to do today?
Day Trips Canada - http://www.day-trips.ca

one of the smartest posts I have yet seen on 204 pages of this thread!

Thanks dtc, I wasn't aware that they qualified based on a higher rate. Good to know the banks build in that buffer, unlike what happened in the US. While you are probably right about interest rates, you are kidding yourself if you think 9% is impossible within a decade. Not that I think it will happen either, but if I'm taking out a mortgage I would certainly be prepared for that possibility. I also agree with your analysis on the likely future regarding peoples ability to pay their mortgages, although I do think there are too many people over leveraging themselves. I guess it all comes down to risk tolerance really, when it comes to investments I don't mind some risk, but a house is not an investment, and personally I am not prepared to take a significant risk on it.

While I definitely favour home ownership over renting when feasible I don't have much confidence in the bank's assessments of qualifying people for mortgages they can reasonably afford. Recently my bank qualified our one income household for a huge possible mortgage when we were looking at selling our present home and buying new build. I thought they had made a mistake but they assured me they hadn't in their calculations. There was no way my dh & I could of carried that high of a mortgage & yet their formula used showed it as no problem, scary really.

But the reality is, if the bank approved you, you can carry that high of a mortgage. I think that is what I am trying to say. People ALWAYS pay the mortgage above and beyond all else. The bank knows if push comes to shove, you would pay the mortgage and let the car payments, credit card payments, store card payments go into arrears. You would cancel the daycare and get friends/relatives to watch the kids -- cancel your cell phone, your TV bill. You'd buy "Great Value" products instead of name brands etc.

I'm not saying it's right by any means -- but the calculations done by the bank assume if you keep your job, you will always have the means to pay for that house at the current rate. You may have to live in poverty but you should never have to lose the house.

Unfortunately, many people blame the banks for giving them too much mortgage when in reality it is their individual responsibility. The bank is just saying "we think you can get a mortgage of this size and have the capability to pay for it". The bank isn't saying "you should".

We got a mortgage on our first home for half of what the bank pre-approved for. It's because our lifestyle is one where we like our toys, fine wines, good food, restaurants, travel, nice clothing, etc. We have friends who make literally 50% of our household income, with larger mortgages, and they do just fine. They drive older vehicles (no payments), they don't eat out, they buy store brand groceries, and they don't have the latest and greatest electronics. They are doing just fine as well.

Some people call for the bank to change their pre-approval calculations but that won't solve anything. The actual mortgage payment is probably one of the smaller expenses when you look at overall home ownership (and life). Two car payments, insurance and gas costs more. Never mind expenses like day care, education loans, etc.

Everyone has a different situation. The reality is, the bank knows you will cut out everything else well before you are at risk of losing your home. The primary causes of home mortgage delinquency are job loss, illness, and divorce. These three things the bank has NO way of predicting before you are given approval.

_________________

Looking for something to do today?
Day Trips Canada - http://www.day-trips.ca

No posts since Sinday....quick, does anyone have any links to decent articles that Dabills can post, since he doesn't seem to have any original thoughts on the topic anymore!

Here is one

http://business.financialpost.com/2013/ ... =c649-dc71

_________________

Looking for something to do today?
Day Trips Canada - http://www.day-trips.ca

It's always been hard to purchase a home.

Just now us spoiled people, expect to:
* own a home
* have 2 brand new cars
* cell phones, home line phones, plus cell phones for the kids
* internet, Cable TV x3
* tablets, I Pads, I pods
* game systems
* and a new bike every year for the kids
* 5 nights out at sport events with the kids
* eat out very often

Go back 30 years, all we had was
* the mortgage payment
* One bike life time for each child if you were lucky
* 1 Tonka Truck or 1 Dolly each
* one crazy carpet
* Moving the Antenna's was cable TV
* Sports was playing ball with your siblings
* Eating out??? What was that?

I'm really conflicted on that one. While I think it is a good thing for rates not to be brought down to such low levels, I have a major problem with such interventionist moves by the government, and especially surprising from a conservative government.

It's an idiotic concept.

Let's ensure the banks make more profit, the everyday Joe has to spend longer paying off their house and living with a higher mortgage payment that cuts into his life and the economy -- because people are buying houses they can't afford.

Makes ZERO sense. Same with people chanting "raise interest rates" -- why, so you can pay MORE to the banks?

The right thing to do is to keep up with the things government SHOULD control -- namely CMHC approval criteria. 25 year is a good amortization -- how about making sure buyers qualify at a higher rate (even higher than posted)? Say 7-8%? How about making sure buyers using CMHC have a better TDS ratio than what the banks require? How about increasing minimum down payment? Decreasing maximum property value? No CMHC for HELOCS.

There are still plenty of tools in the finance ministers tool shed. Let the responsible ones enjoy these rock bottom rates. Imagine you've got 5-10 years into your mortgage already and it just came up for renewal? Wouldn't you want to get access to that 2.89%? Why should you pay higher? Imagine the extra cash you will have to throw into the economy or retirement with a lower payment for another 5 years?

_________________

Looking for something to do today?
Day Trips Canada - http://www.day-trips.ca

^ I agree with all the suggestion you made, and definitely agree there are other steps that should be taken to ensure people are properly qualified (more strongly than done so presently), and can handle big rate increases, and I believe no one should be allowed a mortgage with less than a 10% down payment. That said, the ongoing low rates are fueling real estate price increases that are totally out of touch with reality. Too many people are not presently applying rational decision making with regard to home purchases (they buy as much as the bank will let them), and it is resulting in a skewed market where people who wish to be financially responsible (obviously depends on your definition) can't afford a nice home, even on strong incomes. Reducing max amortization to 20 years would accomplish this goal, but no government is going to do that.

I'm presently renting as I would not consider buying a home without being able to meet the "20/20 rule", meaning minimum 20% down payment, maximum 20 year amortization. You lose more money to the additional amortization than you lose by renting (assuming your rental choice is relatively frugal).