Sunday, November 16, 2008

Falling home prices put some buyers 'under water'

The day Adele moved into her $192,000 townhouse in Brampton in May, she was "under water."

That's because she had a 100 per cent mortgage – not a penny for a down payment – and a 40-year amortization that had to be insured. In the end, she owed $199,000 for the three-bedroom house.

Under water.

Negative equity.

These terms strike fear in the hearts of homeowners who have been merrily calculating their net worth based on rising housing prices in Toronto and the GTA. Read the rest of this article.

In a market where there is a slow or low appreciation in property prices ie. 3 - 5% annually, it is possible to be underwater or negative equity on your mortgage for years.

This is further compounded by people making 5% down or zero down purchases where the cash back option is taken. Let's say for example that you Purchased a home with 5% down on $300K, thats $15,000 down, plus closing costs. The mortgage that would be at $285.0 is now added to by the 3% CMHC premium plus the 6 or 7% cash back option that you may have chosen. The new payment would be calculated on an actual balance of $293K ( 285 + 8.5 cmhc ).

Taking the cash back option does not reflect the true price of borrowing but adds back amounts advanced into the mortgage amount plus interest and an (increased) adjusted rate to reflect the benefit you have received. ( in the next five or six year term of your mortgage you are paying back the addition benefit of $17.0K that you received.

The Toronto real estate market, even, if a zero or negative return, will continue to be a mecca for people coming to Canada, to follow their dream of home ownership. CMHC recently released details that the percentage of home owners was 68.4%.

No matter how well you could do with cash in the bank. currently offering a rate of +/- 3%, you cannot house and raise a family in a safety deposit box. Simply put, you will need a place to live.

Renewed credit criteria vigilance and stricter appraisal practices may make purchasing a home more challenging but those that commit to the long term of home ownership will have better returns over decades than examining a micro period ( ie 30 days).

I urge you to re evaluate your family situation; Do you need a NEW downtown condo with a two story lobby and health club like facilities on site; or would an older building be more suitable with more square footage and better per square foot values?

For those naysayers; I would remind you that in the previous recession Donald Trump had a negative equity of sum $470 Million Dollars.

1 comment:

Justin Sara said...

Very good post. Made me realize I was totally wrong about this issue. I figure that one learns something new everyday. Nice,informative website by the way. .
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