cdr108
Senior Member
http://www.yourhome.ca/homes/article/535090
Falling home prices put some buyers 'under water'November 15, 2008
Trish Crawford
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.
Housing prices have plunged in Vancouver, Calgary and Saskatoon in the wake of huge increases of 30 and 40 per cent. As the bubble bursts, tales abound of houses not being worth their mortgages.
Most Toronto residents facing this possibility are those who bought during the past two years of peak prices and with very little money down, or what's called "very little skin in the game."
Adele isn't worried, though.
With monthly payments of $582, she sees herself as ahead of the game as the family of four had been paying $800 a month for a basement apartment. The possibility of a housing slump – the Toronto Real Estate Board reported a 10 per cent drop in average house prices for October – doesn't alarm her.
What's important to her is that the kids have their own rooms, a yard to play in and a family-oriented neighbourhood.
"I have no problem at all. Ten, 20 years down the road, when the kids grow up, we'll be fine," says the 41-year-old homemaker married to a construction worker. "For me, it doesn't matter if it goes down, I have my home. It's not upsetting because I'm prepared to stay."
Toronto doesn't need a real estate bust for some homeowners to be in negative equity territory. Many who bought houses under an 18-month no-money-down mortgage experiment in Canada owed more than their houses were worth the day they closed the deal.
That program was killed by the federal government on Oct. 15 but other high-ratio mortgages, with as little as 5 per cent down, mean there are a lot of people who are only a squeak away from being under water.
A.H. bought his first house in June after plunking down a 5 per cent deposit on a $179,000 condo in Scarborough and owes the bank $175,000 because of added charges. The 32-year-old, who works in the service sector, is aware he may have little equity in his 675-square-foot, one-bedroom unit but says, "Hopefully, down the road, it will be a good investment."
He's planning to take a part-time job so he can lower his mortgage total when it comes up for renewal in five years.
"My ultimate goal is to be here five years or so," he says. "I tell people I'm 95 per cent happy. It's a foot in the door."
His $740 monthly payments are cheaper than any rent he would pay for a similar space. And, he's happy that he got an affordable place in a nice neighbourhood. "I didn't want to live in the ghetto," he says.
Those who bought at the top of the market with little money down and no equity should just sit still, says Ann Pope of Assured Mortgage.
"You cannot be selling at this point," she says.
Mortgage broker John Cocomile says the current situation is fraught for those who bought with no money down. The concept "is fine and dandy until the market goes soft."
You're in no position to weather downturns in the economy because you can't sell your house for cash, he points out.
"What if you lose your job?"
Therefore, negative equity isn't a today problem so much as one that looms down the road should the economy or the housing industry falter.
In Ontario, unlike the United States, owners are on the hook for any loss on the mortgage, points out Cocomile of GreedyMortgage.com.
While it's unknown how many new homeowners are in negative equity territory, the numbers are significant.
By the time the federal government pulled the plug on 100 per cent mortgages, they were accounting for 20 per cent of the loan applications to lender MCAP, says Ron Swift, president of MCAP Service Corporation. The good news is that the majority of those would have still qualified under the new, improved 5 per cent down and 35-year term rules, he says.
"We needed to have some sense that people had some skin in the game," he says.
But the bad news is that 5 per cent isn't really that much better. All it takes is a 5 per cent downturn in the market to wipe you out, Swift points out. "We get no real equity when all is said and done. Hopefully, people will take the longer view."
First-time buyer Amanda Wakely, 32, says her new 2,200-square-foot house in Whitby has three bedrooms and a yard big enough for a family one day.
"We like to put down our roots. We didn't want to outgrow it in three or four years."
She and her husband, Chris, 31, put 5 per cent down on the $315,000 house in March. They were approved to borrow more money, she says, but they opted to stay in an affordable range.
In spite of the rumblings in the real estate market, Wakely is calm about her purchase.
"We feel quite good about where we are. In the long term, real estate is safe."
Artists Tom Melissis and Lea Creswell are eagerly awaiting the Dec. 1 closing on the Upper Beach house they are buying for $335,000 with 5 per cent down.
Creswell has been following the market closely for the past year and she noticed a general cooling. They were in two unsuccessful bidding wars before they bought their house for less than asking price Theirs was the only offer.
"The market came to a standstill," says Creswell, 35, a choreographer who runs a dance school. If prices should fall, "it wouldn't upset me," says Creswell, because she thinks they got a good deal and they plan to stay for a long time.
She credits Melissis, 50, an actor, with holding her back from some pretty emotional decisions early in the game. Melissis recalls a cottage with gingerbread, but no basement, that looked like a "Hansel and Gretel" house.
Now he's pretty solid about the house they are getting, come what may with prices.
"If it started to plummet, I wouldn't feel as bad as those who got in a year ago," he says. "I'd just accept it. It's like buying hockey equipment and finding it on sale a year later.
"I'm going to stay here the rest of my life."
Dee Diaz, 35, put 25 per cent down on her condo townhouse in Bloor West Village in December and says she feels has peace of mind now, no matter what happens.
"I think I bought smart for what we may be facing in the market," she says of the 1,000-square-foot, two-level condo for $259,900. "At the end of the day, it's still the smartest investment. I think I'll be making money moving forward. I strongly believe that."
The single woman, who works in the non-profit sector, has continued to check out prices in her development and believes the value has remained.
For most people, buying a house is the single biggest financial decision they will ever make, says Royal LePage, Johnston and Daniel vice-president Dianne Usher. "It is the cornerstone of their financial portfolio."
Because of that, most buy cautiously and with the view it is a long-term commitment, she says.
Caution is the watchword for first-time buyers such as charity fundraiser Alison Portt, who has decided to buy next year, out of town and with more money down.
She and her husband, who works for an audio-visual company, have decided to make a 20 per cent down payment and stay within a $300,000 price range.
Although they could borrow much more and live in the city, Portt doesn't want to be so close to the edge financially.
"We are not prepared to overpay," says Portt.
"We want a house we can afford and that can grow with us."
By the numbers
What happens when the real estate market softens? For someone who put no money down on a $300,000 house with a 40-year amortization rate, the mortgage would be $311,100.
-$11,100
Amount of negative equity from Day 1.
-26,000
Amount of negative equity if house values drop 5 per cent.
-$41,100
Amount of negative equity if house values drop 10 per cent.
For someone who put 5 per cent down on a $300,000 house with a 35-year amortization rate, the mortgage would be $293,977, including CMHC premium.
-$8,977
Amount of negative equity if house values drop 5 per cent.
-$23,977
Amount of negative equity if house values drop 10 per cent.
Falling home prices put some buyers 'under water'November 15, 2008
Trish Crawford
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.
Housing prices have plunged in Vancouver, Calgary and Saskatoon in the wake of huge increases of 30 and 40 per cent. As the bubble bursts, tales abound of houses not being worth their mortgages.
Most Toronto residents facing this possibility are those who bought during the past two years of peak prices and with very little money down, or what's called "very little skin in the game."
Adele isn't worried, though.
With monthly payments of $582, she sees herself as ahead of the game as the family of four had been paying $800 a month for a basement apartment. The possibility of a housing slump – the Toronto Real Estate Board reported a 10 per cent drop in average house prices for October – doesn't alarm her.
What's important to her is that the kids have their own rooms, a yard to play in and a family-oriented neighbourhood.
"I have no problem at all. Ten, 20 years down the road, when the kids grow up, we'll be fine," says the 41-year-old homemaker married to a construction worker. "For me, it doesn't matter if it goes down, I have my home. It's not upsetting because I'm prepared to stay."
Toronto doesn't need a real estate bust for some homeowners to be in negative equity territory. Many who bought houses under an 18-month no-money-down mortgage experiment in Canada owed more than their houses were worth the day they closed the deal.
That program was killed by the federal government on Oct. 15 but other high-ratio mortgages, with as little as 5 per cent down, mean there are a lot of people who are only a squeak away from being under water.
A.H. bought his first house in June after plunking down a 5 per cent deposit on a $179,000 condo in Scarborough and owes the bank $175,000 because of added charges. The 32-year-old, who works in the service sector, is aware he may have little equity in his 675-square-foot, one-bedroom unit but says, "Hopefully, down the road, it will be a good investment."
He's planning to take a part-time job so he can lower his mortgage total when it comes up for renewal in five years.
"My ultimate goal is to be here five years or so," he says. "I tell people I'm 95 per cent happy. It's a foot in the door."
His $740 monthly payments are cheaper than any rent he would pay for a similar space. And, he's happy that he got an affordable place in a nice neighbourhood. "I didn't want to live in the ghetto," he says.
Those who bought at the top of the market with little money down and no equity should just sit still, says Ann Pope of Assured Mortgage.
"You cannot be selling at this point," she says.
Mortgage broker John Cocomile says the current situation is fraught for those who bought with no money down. The concept "is fine and dandy until the market goes soft."
You're in no position to weather downturns in the economy because you can't sell your house for cash, he points out.
"What if you lose your job?"
Therefore, negative equity isn't a today problem so much as one that looms down the road should the economy or the housing industry falter.
In Ontario, unlike the United States, owners are on the hook for any loss on the mortgage, points out Cocomile of GreedyMortgage.com.
While it's unknown how many new homeowners are in negative equity territory, the numbers are significant.
By the time the federal government pulled the plug on 100 per cent mortgages, they were accounting for 20 per cent of the loan applications to lender MCAP, says Ron Swift, president of MCAP Service Corporation. The good news is that the majority of those would have still qualified under the new, improved 5 per cent down and 35-year term rules, he says.
"We needed to have some sense that people had some skin in the game," he says.
But the bad news is that 5 per cent isn't really that much better. All it takes is a 5 per cent downturn in the market to wipe you out, Swift points out. "We get no real equity when all is said and done. Hopefully, people will take the longer view."
First-time buyer Amanda Wakely, 32, says her new 2,200-square-foot house in Whitby has three bedrooms and a yard big enough for a family one day.
"We like to put down our roots. We didn't want to outgrow it in three or four years."
She and her husband, Chris, 31, put 5 per cent down on the $315,000 house in March. They were approved to borrow more money, she says, but they opted to stay in an affordable range.
In spite of the rumblings in the real estate market, Wakely is calm about her purchase.
"We feel quite good about where we are. In the long term, real estate is safe."
Artists Tom Melissis and Lea Creswell are eagerly awaiting the Dec. 1 closing on the Upper Beach house they are buying for $335,000 with 5 per cent down.
Creswell has been following the market closely for the past year and she noticed a general cooling. They were in two unsuccessful bidding wars before they bought their house for less than asking price Theirs was the only offer.
"The market came to a standstill," says Creswell, 35, a choreographer who runs a dance school. If prices should fall, "it wouldn't upset me," says Creswell, because she thinks they got a good deal and they plan to stay for a long time.
She credits Melissis, 50, an actor, with holding her back from some pretty emotional decisions early in the game. Melissis recalls a cottage with gingerbread, but no basement, that looked like a "Hansel and Gretel" house.
Now he's pretty solid about the house they are getting, come what may with prices.
"If it started to plummet, I wouldn't feel as bad as those who got in a year ago," he says. "I'd just accept it. It's like buying hockey equipment and finding it on sale a year later.
"I'm going to stay here the rest of my life."
Dee Diaz, 35, put 25 per cent down on her condo townhouse in Bloor West Village in December and says she feels has peace of mind now, no matter what happens.
"I think I bought smart for what we may be facing in the market," she says of the 1,000-square-foot, two-level condo for $259,900. "At the end of the day, it's still the smartest investment. I think I'll be making money moving forward. I strongly believe that."
The single woman, who works in the non-profit sector, has continued to check out prices in her development and believes the value has remained.
For most people, buying a house is the single biggest financial decision they will ever make, says Royal LePage, Johnston and Daniel vice-president Dianne Usher. "It is the cornerstone of their financial portfolio."
Because of that, most buy cautiously and with the view it is a long-term commitment, she says.
Caution is the watchword for first-time buyers such as charity fundraiser Alison Portt, who has decided to buy next year, out of town and with more money down.
She and her husband, who works for an audio-visual company, have decided to make a 20 per cent down payment and stay within a $300,000 price range.
Although they could borrow much more and live in the city, Portt doesn't want to be so close to the edge financially.
"We are not prepared to overpay," says Portt.
"We want a house we can afford and that can grow with us."
By the numbers
What happens when the real estate market softens? For someone who put no money down on a $300,000 house with a 40-year amortization rate, the mortgage would be $311,100.
-$11,100
Amount of negative equity from Day 1.
-26,000
Amount of negative equity if house values drop 5 per cent.
-$41,100
Amount of negative equity if house values drop 10 per cent.
For someone who put 5 per cent down on a $300,000 house with a 35-year amortization rate, the mortgage would be $293,977, including CMHC premium.
-$8,977
Amount of negative equity if house values drop 5 per cent.
-$23,977
Amount of negative equity if house values drop 10 per cent.
The person would end up paying over double the amount of the original price at the end.
