We are just recovering from a punishing recession in which millions of jobs were lost and portfolios were decimated by a market downturn. Across the border, home owners are defaulting on their mortgages in record numbers because they loaded up on mortgage debt at teaser rates and are unable to make mortgage payments when the rates reset at a much higher level. Therefore, it is surprising to read that many Canadians refuse to learn from recent experience and are loading up on long amortization, variable-rate mortgages at record low interest rates. The Globe and Mail reported today that mortgage brokers are doing brisk business as many first-time home owners rush in to take advantage of today’s (probably temporary) low rates:

It’s these buyers who have raised fears of a bubble, negotiating mortgages at historic lows, opting for 35-year terms and making small 5-per-cent down payments to keep monthly outlays down and put previously unaffordable homes within their reach.

“They are taking advantage of things that are a lot more attractive initially but they could find themselves in a position where they couldn’t afford their mortgage if rates start to go up,” Mr. Averbach says.

This report comes in the wake of a recent interview The Toronto Star conducted with Peter Aceto, CEO of ING Direct Canada:

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

Those who fail to study history are condemned to repeat it. Those who ignore very recent experience are just being stupid.

This article has 63 comments

  1. Wow that’s insane. The worst part is that when the inevitable reckoning comes everyone will pay the price.

  2. “Those who ignore very recent experience are just being stupid.”
    Your addition to the saying is great!

  3. The problem with some of these new consumers is they are attempting to live their parents lifestyle, or worse, live above their parents lifestyle. Buying more house than you can afford seems to be Normal these days, because with low interest rates they are only a little “house poor”, but if interest rates triple to 7.5% what happens then?

    I am in a variable rate situation, but I also have more than half the value of my house paid off as well, and am attempting to take advantage of these low rates to make larger payments to decrease the principle of the loan.

    Stupid? Maybe, Naive, more likely.

  4. Canadian Capitalist

    Big Cajun: I’m not saying everyone who opts for a variable-rate is stupid. Of course not. That would be a stupid thing to say.

    But if a homeowner goes for a 35-year am, 5% down and can barely afford the 2.5% variable rate mortgage when US homeowners have lived through the folly of such a strategy, I hope you’ll agree that it’s being stupid.

  5. I think your remarks about these borrowers are spot on, but I wonder about the sanity of the lenders as well. If many of these loans really are bad, then are the lenders adequately protected if they have to seize the house, or will they lose money in this case? If the expectation is that these loans will be unprofitable, then who will end up on the hook for the losses? In the recent US debacle, we found out that many of these losses were shifted to hapless investors.

    For a couple who have no prospect of ever owning a home, I can see them making a rational decision to take this one shot to live in a home for as long as possible until the house is taken away from them. This way of thinking may be self-centered and short-sighted, but it is predictable that some will think this way.

  6. That last sentence is my new “quote of the year”:

    “Those who fail to study history are condemned to repeat it. Those who ignore very recent experience are just being stupid.”

    That is a great line!

    William

  7. Counter to logical thinking, it seems that too many decisions are made on a ‘can I afford the monthly payment’ vs. ‘can I afford this overall purchase w/ maintenance, taxes, etc’, future payments.

    The same thing is being done on vehicles (6 – 7 year loans), which are sold on a $99 bi-weekly basis. Or a commercial I saw yesterday ‘We’ll make your first month’s payment!’. Wow, what a deal!

    Unfortunately, I’ve lost faith in the general population that they make rational long-term financial decisions.

    I guess that’s why business like ‘rent-to-own’, ‘CashMoney’, ‘MoneyMart’ are making billions without adding much (if any) value to society.

    I think my post sounds bitter, but that’s how I feel about that topic.

  8. This is why I locked in at 3.64% when I got my mortgage in June. Interest rates will go higher and only then when mortgage payments (due to additional higher interest) move higher will home owners realize the mistake they’ve made.

    Of course if rates stay low then everything will be fine, but at some point individuals will be caught (likely near the end) when rates move and they’ll be left scrambling to make up the difference or default.

  9. Those people are idiots – and so are the lending companies that are making those risky loans.

    It’s ironic that they are using variable rate loans when they really should be using fixed rate (long term) since they can’t afford any increase in payments.

  10. Canadian Capitalist

    @Michael: I think the lenders (someone more knowledgeable may want to correct me if I’m wrong) are protected because these are insured mortgages. In case of default, any shortfall is covered by CMHC. My understanding is CMHC collected the premiums, so they’ll be on hook for making up any downfall. CMHC is (implicitly?) backed by tax payers.

    Unlike the US, Canadian homeowners do not have the option of just walking away from their mortgage. These are full-recourse mortgages. The homeowner is on hook to pay them back.

    @Scott: I share your frustration. That’s exactly the thinking here. I can afford these low monthly mortgage payments without much thought to how much debt they are taking on or how rising interest payments could affect affordability.

    I wouldn’t have been surprised if the general public behaved like this after a sufficient time had passed after this crisis. What’s surprising (at least to me) is the same suicidal behaviour that caused so much trouble is being repeated so soon with the crisis barely behind us.

  11. There is definitely stupidity in the system (on both sides), if the borrowers can’t afford it, that is stupid, but as MJM points out the lenders aren’t exactly bright either.

  12. CC, you’ve got it exactly right on the CMHC – the lenders lend the money because it’s a guaranteed investment backed by taxpayers.
    The 35 year mortgage should simply not be available, or at lest require 20% down.
    The bubble that’s going on in Vancouver is insane.
    The thing is the real estate agents & agencies are lobbying hard to keep the party going for as long as possible.
    What I wonder is what will happen to the XSB short bond which holds a lot of bonds from the housing corporation. Do those loans going under imply defaults on the bonds?

  13. So, I guess if CMHC is underpricing its backing of mortgages because lenders are going after unusually risky mortgages, it is taxpayers who are taking the risk while the lenders take the up-side. If CMHC isn’t underpricing its backing, then the only problem is that individuals are harming themselves by taking on mortgages too big to handle.

    • Canadian Capitalist

      @MJ: Yes, it is CMHC’s responsibility to charge an appropriate premium for the risk they are bearing.

      I went digging on the CMHC website and I found this FAQ:

      http://www.cmhc.ca/en/corp/faq/faq_001.cfm

      Here’s what it says when a mortgage is in default:

      “In situations where mortgagors haven’t made their regular payments, as required under the terms of their respective mortgages, the issuer MUST make these scheduled payments to the CPTA for credit to the NHA MBS investors, as if they had been made. CMHC mortgage insurance protects the lender/issuer against mortgage default, assuring payment of principal and interest in accordance with the terms of the mortgage insurance policy.”

      It is also clear that Mortgage-backed securities are backed by the GoC. Here’s another interesting tidbit:

      “In 1998, average yields over comparable Government of Canada bonds were approximately 60 basis points (0.60%) for prepayable issues and 30 basis points (0.30%) for non-prepayable issues.”

  14. Good call CC. I predicted the same quite a while ago. In the U.S. I think it goes in part with the need to live the American dream and the deeply ingrained belief, more is more and bigger is better. Even in Canada there are those who are led to believe in the millionaire dream and making easy money through various real estate shows and self-help gurus. There are some who find it hard to resist the “I have, think, can buy, own etc., therefore I am” value system. Even the great Warren Buffett in an interview many months ago did not see human behavior and buying habits changing much.

  15. BTW what drives me more is when these same people end up in bad situations in large part from thier own creation and then play victim and expect others to bail them out. They are either unwilling or unable to take ownership and learn from the negative consequences of their behavior and choices.

  16. The lenders aren’t being stupid — CMHC gives them an explicit government guarantee, so these mortgages, though perhaps risky to the system, are not at all risky to the banks. Indeed, there are anecdotal reports of banks requiring buyers to take out CMHC insurance even with a 20% down payment.

  17. I take part of my comment back – the lenders aren’t being stupid, instead they are being smart since the gov’t is backing the loans.

    Which leads to my new blanket statement – the government of Canada is stupid for backing these kinds of loans. It’s one thing to promote home ownership but there has to be a limit.

  18. “BTW what drives me more is when these same people end up in bad situations in large part from thier own creation and then play victim and expect others to bail them out. They are either unwilling or unable to take ownership and learn from the negative consequences of their behavior and choices.”

    Kind of like the auto sector…haha but that’s for another day.

    I don’t understand is why everyone feels the need to dump on variable rate mortgages. Every product has its place. When I purchased my house late last spring I went with a variable rate. I received prime minus 1%, as of today my interest rate is 1.50% after starting at 4.5%. My mortgage payments don’t fluctuate with interest rates, they stay the same. In my case as of right now more is going towards principle, if and rates head up more of my payments will be going towards interest. I don’t know of anyone who is using the old school method of having their payment amount move up and down.

    Now when my mortgage comes up for renewal, I will be more inclind on the next round to have a fix rate mortgage because I expect inflation to start to kick in and rates will most certainly go up.

    Don’t be hatin the VM. everything has it’s place and not all procducts are made for everyone. At the end of the day it’s banks who make bad loans to people who shouldn’t be getting it.

  19. There is definitely the potential for a lot of people to be surprised by high interest rates and subsequently high payments in the next five to ten years. It is so important for Mortgage Brokers to start acting more like Mortgage Planners, and a big part of that is making sure that clients have substantial savings plans in place just in case of a rainy day.

  20. Well, I just got a new house & mortgage over 35 years. But hear me out! I put down a large downpayment (abour 45%). I took the 35 years amortization so that, in case I do lose my job, I can still afford the minimum mortgage payments. It’s a job-loss safety net. All I have to do is to be confident enough that I will use the pre-payment options available on the mortgage as much and as often as I can afford.

  21. Canadian Capitalist

    Scott S.: I’m definitely not dumping on VRMs. In fact, I recently wrote that VRMs are once again looking attractive. Personally, I’ll go for it at today’s low rates. But if I opted for a VRM at the maximum amortization allowed (35 years) and the minimum downpayment required (5%) because I can barely afford the house otherwise, I think you’d agree that I’m playing with fire. Especially considering how many have been so recently burned by doing exactly that!

    http://www.canadiancapitalist.com/time-to-opt-for-a-variable-rate-mortgage-again/

  22. I do agree with the general sentiment, but I do wish to point out that not *every* person who puts 5% down is an idiot (though we didn’t go for a 35am so may not be calling me an idiot anyway).

    1) We didn’t have much cash on hand as I was finishing my master’s when we bought and we wanted to keep enough money in the bank to furnish the house and pay closing costs.
    2) There was an excellent house for sale in our town and no rentals to speak of at the time.
    3) We chose a 5-year fixed rate to protect ourselves from fluctuations and by the time rates go up, our student loans will be paid off and we can transfer those big fat payments to the mortgage.
    4) Our house cost less than I make in a year. <3 rural Canada.

  23. I agree that both FRMs and VRMs have their place, and as for which is right depends on too many variables to list now.

    We bought our house before the real estate bubble (7 years ago), and opted for a fixed rate mortgage. We didn’t want our amortization to lengthen longer than 25 years (fixed payment, rising rate), and also we knew that we wouldn’t be able to afford an increase in our mortgage payment at that time (fixed amortization, rising rate). Sure enough, rates rose over those 5 years and in the end, our fixed rate was less than the posted variable rates (by a measly 0.06% though). The peace of mind during that time was worth the added interest cost.

    Fastforward 5 years, time for renewal:
    Nearing the end of my degree, running a reasonably successful home business which allowed for more flexibility in payments, and the fact that the posted fixed rates were about 0.8% higher than we were currently paying, and variable rates were .06% higher. We opted for the variable rate this time because of our flexibility in income would allow for increasing payments, and figured that since we were still paying more interest than principal, the lower variable rate would help us bring down the principal faster, thus lowering the amount of interest we would be paying if rates went up.

    As it happened, everything fell apart, rates tumbled, and as a result we are 2 years into our 5 year term and roughly $8000 ahead in principal vs. if we had stuck with a fixed rate.

    As my other friends and siblings have entered the market in the past year, each to my knowledge have opted for fixed rates, since the premium at the time was only 0.5-0.8%. I say good for them.

    I think it all comes down to fundamental money management skills not being taught in schools, and I would venture a guess that they are equally not being taught in most homes.

  24. Variable rate mortgages: Variable rate mortgages are tempting right now. But VRM’s are not for everyone. You need money in the bank, stable income, a modest mortgage size relative to income, etc, etc. If you’ve insulated yourself from risk, then it’s a valid choice. I first took on a mortgage in 2005, and have been fixed since, with one early renewal. Given hindsight on interest rates between then and now, and knowing today that we may be able to demolish the rest of the mortgage in a few years, I absolutely wish that I had gone variable throughout and had a nice P-0.9 on my hands. The other side of the coin is that, given my current views on who should hold a VRM, I would still advise my younger self to do what he did – go fixed. Just married, only a year into careers, lesser financial assets and equity – you’ve got to protect the fort before you go plundering through the neighbouring villages.

    35-year amorts: seems to be two drivers to this. One, prices are rising, which means more people have to take longer amorts. in order to reduce monthly payments. Two, as others have mentioned, a lot of people are saying, “Why not? I’ll still make my payments at the 25-year discharge rate, and if SHTF, this gives me the option to reduce monthly expenses.” Indeed, there is absolutely nothing wrong with this, provided the mortgagee does choose to make the higher payments. I recall when we were first signing the mortgage, we were tempted to choose 20-year amort, but the associate pointed out the wisdom of the standard 25-year for just this reason.

    If 35-year amorts. are indeed the norm these days (I’ve only seen this anecdotally, and through such interviews as Mr. Aceto above), then I would love to know which of these two drivers is the stronger contributor. This would be telling information, but I’m sure nobody is gathering that statistical information actively, outside of telephone survey data. I’d like to think it’s more of the latter than the former, but I strongly doubt it.

    CMHC and mortgage risk: This does appear to be a situation where the banks are lending money, and earning profits on doing so, and passing on the default risk to the CMHC and ultimately the good old taxpayer. As mentioned by others, provided they are pricing the risk appropriately, and collecting enough fees to cover the defaults, fine. But, my gut feeling is that the risk is understated, and we’re all collectively going to end up footing the bill for today’s foolishness. This feels a lot like a big machine that everyone knows is heading for a brick wall, but everyone thinks someone else is driving, or figures their interests are covered (banks have CMHC, politicians have pensions).

    Overall: I’m worried that young Canadians in particular are loading up on more mortgage debt than they should be carrying because of its current affordability due to low rates, and will be paying for their bricks, 2×4’s and drywall for a long time and end up house-poor, cash-poor. And I’m worried that mortgage defaults will add yet another tax burden on Canadian taxpayers who are already looking at a decade of moribund economic growth, shrinking workforce, aging infrastructure, and growing healthcare costs.

  25. I have to agree with the general sentiment of the people here. Purchasing a home with a 35 year amortization and no real down payment with a low variable rate is risky. A very large portion of those people will be people who can only afford their payments because of the long amortization and as soon as interest rates rise they are going to be in trouble.

    On the other hand I love the 35 year amortization because it was and is very useful for myself in keeping my monthly payments affordable even with uncertainty of jobs. So even though I could afford a 25 year amortization I opted for longer to ensure I would not default if job loss occurred.

    I realize I’m not “normal” and thats all well and good for me. I think we have a cultural problem where people don’t think about any more than right now, yes I could have bought a much larger house than I did, heck right now with the interest rates as low as they are I could upgrade my house about 150K without affecting my monthly payments. Did I consider that, yes. Did I do it, no, that would have set me up for failure.

    I don’t really blame the mortgage brokers. They are doing their jobs and getting their customers the best deals available (at least most of the time). The lenders are being quite foolish, and especially CMHC or a similar guarantor are not really thinking.

    I understand that there might be recourse in Canada, still, trying to bleed money from someone who just doesn’t have it isn’t going to work either. If someone cannot make their mortgage payment it usually means they don’t have the money, trying to get more money out of them because the house isn’t worth what was paid for it just isn’t going to work either.

    I have seen some lenders taking a more proactive approach to lending money. When they have a variable rate mortgage request they approve them based upon their ability to borrow money on the 5 year fixed rate. This at least helps the lender to disqualify those who just barely meet the requirements at our historic low interest rates.

    @CC – thanks for the larger comment box, much appreciated.

  26. Great article CC.

    Somebody please wake up the bank regulators– they seem to be asleep on this one!

    Here in the Okanagan, the housing boom continues. This is just crazy. Things in the trades went very quiet last fall and winter, but now the trades-people are too busy again.

    I’m not a gloom and doom type, but I just don’t see this latest bubble ending well.

  27. i agree to general sentiment :)) i can add it to my essay writing service site.

  28. This is a business model applied by the banks to enslave as many poor (and, unfortunately, stupid) people as they can. The government will do anything the banks are requesting as the banks (and other few corporations) are, of course, controlling the government.
    CMHC, 5% down, 35 years amortizations – all these are designed by the banks. When people will not afford to become bank slaves even with those, then the banks will introduce new innovative products: 0% down (or maybe even negative “down-payment”), 100 years amortizations, etc.
    And all this while making the slaves think they are millionaires. They will be, because any house will be more than a million, as is now in Vancouver. However, the standard of living will continue to regress to the point where millionaire home owners will barely afford food, not to mention they will only retire at death.

  29. Let me play Devil’s Advocate. (but I put out the disclaimer: I think 5% down, 35yr mortgages are idiotic too!)

    Perhaps why this is continuing to occur is because the majority of the people taking on these mortgages are new home owners.

    They actually didn’t suffer any consequences over the past year (I’m willing to bet their exposure to the equities markets is minimal also).

    So, its always the young, naive, new homeowner that puts themselves into this position. Dont’ we all remember how emotional and exciting it was when we first bought a home, clouds peoples vision, and when the ‘crash’ was all anecdotal to them – it didn’t hurt enough to put fear into them.

  30. I think we need to make a distinction between those that go the 35-year route because that’s all they can afford, and those that do it to mitigate financial risk. The former are stupid perhaps. Other possibilities are desperate and/or risk-loving. The latter could be considered prudent, so long as they follow through on their intention of making additional lump sum payments when the excess cash is available to do so. Is it easier to say then do in this respect.

    Those currently stretched to the hilt even with the 35 year amortization could very well be in for a rude awakening. If that constitutes a large number of people, perhaps some sanity will return to the housing market.

  31. I had read not too long ago an article online that mentioned how those making less than 20-25% downpayments are getting lower interest rates than those who can. Reason? Because even though the borroweres are higher risk because of the lower downpayment, insurance covers the banks/finanacial institutions, while the insurance is waived if it’s over 20-25% leaving the financial institutions with no protection.

    I can’t seem to find the link unfortunately, but wanted to add since it seems relevent to the discussion on CMHC and people paying 5%.

  32. ‘They’ may be stupid, but ‘we’ are the ones who will suffer the consequences

  33. Also, keep in mind that 50 years ago when you took out a 25 year mortgage, you paid it for 25 years. These days when you take out a 35 year mortgage you have so many options that the original term is really more like selecting a minimum payment amount. You’ll never know the true amortization period until the amount is paid off.

    Over at Canadian Mortgage trends they put up some great stats just today that include great tidbits of info to help sooth the doom and gloomers out there, things like:

    # 48%: The average loan-to-value of Canadian mortgages.
    # $130,300: The average mortgage balance in Canada.
    # 80%: The ratio of mortgage holders with over 20% equity. (This is a somewhat reassuring statistic for people who fear a bursting real estate bubble.)

    You guys should go look at some of the other stats.

    http://www.canadianmortgagetrends.com

  34. To add to the issue, once IFRS is implemented the banks will likely no longer be able securitize assets under the NHA MBS program without considering their regulatory leverage test (as the assets will likely be put on-balance sheet).

    Currently under Canadian GAAP these mortgages are off-balance sheet and the gains associated with them are treated as income up-front.

    The result: a shrinking of the ability for banks to lend, coupled with rising rates. That’s going to be a bit of an issue.

  35. Good post CC, I’ve been preaching this for over a year now. Nobody listens.

    CMHC also has nothing to lose as taxpayers will have to foot the bill once this explosion happens..people who have been prudent and bought housing they can afford with descent dp’s will also suffer a lose, as housing decreases in price once rates start moving north.

    I know people who are trapped in their house, even with the low rates..the end result will look horrible.

  36. @EZ, post 32: if this is true, it’s troubling. This inversion of common sense, thanks to passing the risk to taxpayers, cannot be for the common good nor sustainable.

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  38. On the other hand, because entire economy depends on real estate prices, don’t you think the goverment will do everything to protect those homeowners. Regardless if they can make their payments or not? Looking at USA isn’t it what we learned? Those who sent thier keys to the banks instead of making payments did not loose much – they did not have much in the first place. But the rest of us was affected. So it depends who is stupid and who is smart.

  39. Re: the variable vs fixed discussion.

    It’s largely irrelevant. Since most of our mortgages are for five years or less, they’re all vulnerable to interest rate shocks. This is especially true with long amortizations.

    With a 35 year am at 4.25% interest, you’ve only paid off 7% of the balance after 5 years (if you don’t pay anything extra). If after that 5 years interest rates have ‘skyrocketed’ to 4.8%, you have to sign another 35 year am if you want to keep the same payments.

  40. Canadian Capitalist

    @Ben: I agree that there is only anecdotal evidence that longer term mortgages are chosen by homeowners struggling to fit a mortgage within their budget. But I wonder how many of the 50% new mortgages which have a 35-year am do so for cash flow management purposes. My guess it not that many. Even if 1/2 the long am mortgages were taken out by new homeowners struggling to fit a home in their budget, it is troubling news.

    @Cam: The mortgages we’re talking about here are conventional, prime mortgages taken out by people with good credit. If their homes end up being foreclosed and the sale does not repay the mortgage, bad things start to happen. Creditors can come after their other assets, sue to have wages garnisheed etc. Full recourse gives a lot of downside protection for lenders.

    @Sampson: That’s an interesting theory. It could well be that new homeowners are loading up on mortgage debt because they haven’t experienced the vagaries of the market first hand and even if they’ve read about it, believe it won’t happen to them.

    @EZ: I find it hard to believe that’s the case. CMHC says all NHA mortgages have Govt. of Canada backing, including mortgages whose LTV is 80% or less. More knowledgeable mortgage experts may want to comment on this.

    @Traciatim: Thanks for pointing to CMT’s post. I had missed it.

    http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2009/11/caamps-annual-mortgage-market-report—2009.html

    @Damir: My understanding is US mortgages are non-recourse. If their home is underwater, they can just hand in their keys. Fortunately (or unfortunately, depending on your point of view), creditors in Canada have recourse to other assets. Of course, it doesn’t mean that we’ll be unscathed.

  41. Bottom line, most of the population does not even understand how a mortgage works. They just hear from a bank/broker that they have been approved for $XXX and think they can spend that much.

    I have been on variable for approx 8 years, with one renewal. I have saved thousands and continue to with prime -.75 open.

    However, I am paying at 5% rate and had a downpayment of over 50%. I am well insulated even if rates do go up.

    What this variable gives me right now, is motivation to pay off the whole mortgage before my 5 year comes up for renewal in 2013.

    This is the biggest difference between people who don’t understand and people who do understand about mortgages. The key is paying it off… when can you do that and can you afford the house in the first place at a 6% rate.

  42. Isn’t when you put a property under a corporation, the interest is tax deductable? The higher you can deduct the better?

    Anyway, I didn’t buy properties this year. It was all done last year when market crashed and everyone panick. People who bought this year are just for the interest and not for the value of the homes. I wouldn’t buy a property for $450,000. Specially for a Condo!! lol… That’s a joke.

    Another bubble coming in!!! Be prepare to snatch again when people started panicking! I say after the HST, Increased of Interest, and hyper inflation. Watch how everything fall.

    See you next year after the fall.

  43. I think the media is tossing the term “bubble” around a bit freely. While the quality of some decision-making (among multiple parties) is certainly suspect, it is not at all clear that the quantity of these bad decisions is enough to create a housing bubble.

    Pedro Antunes, director, national and provincial forecast at The Conference Board of Canada told me builders have been careful. “There are two areas in Canada that are very conservative; one is banking and the other is residential development,” he said. “We haven’t seen any over-activity in relation to the fundamentals.

    Great post, thanks.

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  45. Meanwhile the real estate agent are making a killing at 5% or 6%, but a 2% MER is outrageous!!! I don’t see the media bashing the reals estate agent? and once the deal is signed, good bye next client…

  46. I’d hate to be seen as defending real estate commissions, but they are charged only once on each transaction. MERs are charged every year on the same money. So, a 2% MER is actually worse than a 6% real estate fee. That said, I’d like to see real estate fees drop too.

  47. @Jess: If you own a property within a corporation, yes the tax is deductible, and as you observed, the higher the rate, the more you deduct.

    Unfortunately, I think this viewpoint is slightly flawed for a couple reasons. First, the deduction is not dollar for dollar. i.e. When you deduct $7000 in interest paid on investment loans, you don’t get the full $7000 deduction against your tax owed.

    Second, interest is still interest, even in a corporation. The higher the rate, the more you pay. The more interest is being paid, the less principal is being reduced. I don’t have any hard calculations done, but my instinct says that reducing the amount of principal owed is the best way to improve your ROI. The best way to reduce principal owed is with a low rate.

    Third, the only way increased interest rates will ‘help’ your corporate year end is if you have more deductions than tax owing. But before any celebration on not paying any tax, realize that it probably means the corporation isn’t profitable.

  48. Edit: I’m not quite sure about point #1 all of a sudden, but I still support the other two.

  49. I was one of those 20-somethings that opted for a 35 year term… and I had a few good reasons to do so. (I knew what I was getting into, and I mitigated the risk enough that I felt comfortable with it)

    1) My Fiance and I were both selling our respective properties and buying a new house together. Opting for a 35 year term, meant that we only had to sell one of them right away, to pay a 20% downpayment and keep the payments low enough to get buy on one income.

    2) With the remaining cash from that one property, we took advantage of the market drop.. we made our 20% down, and were still able to put 30k into stocks this march. Yes, this could’ve been risky, but in hindsight it looks brilliant :)

    3) When we finally did sell the other property we kept that equity in our savings account, it’s purpose will is a temporary emergency fund to help us get through a job loss – neither of us have touched it yet – nor will we so long as I can find a job within a year or even two. I hope it will eventually get put back on the mortgage.

    4) We also went with a fixed rate – this way I knew that I could pay my half of the mortgage payment (and all my other obligations) on a minimum wage job.

    We obviously didn’t use the 35 year term to max out our house size or location… simply as a tool. It takes some stomach to buy a house with layoffs looming – as it was I was laid off 3 months after our possession date. I’m glad we had this tool available.

  50. CC, you are right about my post not being relevent to CMHC. I should have noted that the article was written from the US – I thought it was the WSJ or NY Times or something like that. I was able to find the link though – I remember I came across it through the “Intelligent Speculator” blog. Here’s the link pertaining to the US market:

    http://www.nytimes.com/2009/09/06/realestate/06mort.html?_r=1&ref=realestate

    Interesting ramifications.

  51. JF, keep in mind too that Real Estate commissions are generally negotiable. I have a friend who has a situation where two homes are being sold to move in to a larger third home and they are getting a great deal on the fees for using the same agent for all three transactions.

    Try getting three people together and walk in to a bank and ask for a discount on the MER if you all invest together.

  52. @Brock: Agree completely. Which is why Im a big believer in self education and not just taking others at their word…especially if thier job is to sell you something whether it a house or a mortgage. A few years ago my partner who has more experience than I at real estate sat me down and ran numbers so I see exactly what was involved with buying a house and as CC noted the total cost of ownership. He also showed me why it’s smart to pay as much as you can in the first few years because of the interest on mortgages work. He also helped a friend of ours a few years back during the buying mania and she has ended up in great position and better than others who didnt want the advice. My parents always said to not fall in love with things and be willing to walk away if the numbers dont make sense…another one will always come along. BTW yes, the same advice about boys from mom too!

  53. In the past little while I have been trying to talk several family members and friends out of this type of decision. Often I find the Real estate agents and mortgage brokers push the idea on consumers. They show them calculations on how much they can save over renting and how much their home can appreciate in a few years, consumers are blown away by this illustration and fall right into the trap. To them it does not make a difference they get paid their commission and who cares if the client can not make payments when interest rates rise.

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  56. Well here on Vancouver island, Greater Victoria area, we have an over population of condo’s and the new mini detached houses on strata titles. As soon as one condo development finishes two more start. All my friends are telling me to get into the market. Well Im 14months away from paying off my debts. Bad life choices etc.. I don’t plan to touch the market until I have at least 20% down. Most new owners I know are in the exact boat most of your are talking about. Just enough income to pay the mortage, upkeep and buffering is not even on most of these peoples list. Most condo owners here think their home value is rising every day, which confuses the hell out of me when 3 more condo projects start every other week. My question is once Im done with all my debt, where do i start parking my downpayment money? Gic’s? TFSA? Im looking to save 12000 a year for at least 2 or 3 years. Or half that time if i have a partner doing the same. I know for sure Im done being a slave to debt. I most likely will have to start with a condo, but wont be touching anything other then a 2 bedroom style. thanks for your input.

  57. I haven’t read all the comments, so sorry if this has been brought up:

    I find it unfortunate that home prices are generally determined by a buyer’s ability to pay for them from salary. Thus, low mortgage rates drive house prices up since it makes payments lower. Introducing long-amortization mortgages exacerbates the problem, making houses even more expensive.

    Perhaps society as a whole would benefit from interest rates, year in and year out, that are much less volatile, say in the 5-7% range. This would keep homes from appreciating too quickly, bubbling out of control. It’s crazy when homes sell at large multiples of their replacement cost.

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  59. It’s a bubble within a bubble that just doesn’t end! If you must depend on a tax break or housing credit to afford a home, you need not buy it.

  60. Yesterday’s announcement that our nation’s largest union pension fund is going into the mortgage guarantee business seems to be a counter indicator. They are very thoughtful investors (not bullet proof but thoughtful) and see our mortgage market and practices as fundamentally different than the US experience. http://tinyurl.com/y8fp78q

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