25% downpayment!?

[ING_rep]

Yes, I still live there! I didn't buy a 325k condo lol, I got a 190k condo, didn't feel comfortable with a 2000$ monthly payment!

I put 20% down and got a 1.7% rate (riiiight after the economic crash)

I am planning on keeping the condo to rent it, and buying a house for March-May next year. As you said, I need a 20-25% cash down for that, so it takes time.

When I was studying, Desjardins bank was willing to lend us students loans and the amount varied depending on the field of study. In my field, (pharmacology) they were willing to lend us up to 100k a year. One of the guys in my program was living the life! Bought a new car, bought everyone drinks, went on vacation in the south etc. After graduating he told me he had taken these loans and now had 20 years to pay them back. How can you lend a 19-21 years old person so much money!

[primal]

Yes, I still live there! I didn't buy a 325k condo lol, I got a 190k condo, didn't feel comfortable with a 2000$ monthly payment!

I put 20% down and got a 1.7% rate (riiiight after the economic crash)

I am planning on keeping the condo to rent it, and buying a house for March-May next year. As you said, I need a 20-25% cash down for that, so it takes time.

When I was studying, Desjardins bank was willing to lend us students loans and the amount varied depending on the field of study. In my field, (pharmacology) they were willing to lend us up to 100k a year. One of the guys in my program was living the life! Bought a new car, bought everyone drinks, went on vacation in the south etc. After graduating he told me he had taken these loans and now had 20 years to pay them back. How can you lend a 19-21 years old person so much money!

Very wise of you and your story confirms it for me that what you did is even better for the economy, you were able to invest and still have disposable income to purchase more elsewhere... yay!
Wish you the best for your next purchase!

[ING_rep]

Merci! Let me know how it turns out for you, hopefully you are able to get a mortgage for with a lower downpayment (and NO cosigner!)

By the way, welcome to Smart Canucks!!

[primal]

Merci! Let me know how it turns out for you, hopefully you are able to get a mortgage for with a lower downpayment (and NO cosigner!)

By the way, welcome to Smart Canucks!!

Thank you so much.. In all honesty I have never been too finance savvy and getting my younger brother to buy this place for me was probably the smartest thing i have ever done HAHA. But since I am already under some time constraints I opted to renew in a year at which time I should be able to remove the cosigner.

Merci mon ami

[brunt]

Hello all, I hope you are all enjoying the glorious summer despite the lack of rain!

I registered here because..
1. I am a home owner in the process of selling. My brother bought this house 5 years ago with no downpayment at 6%int.
2. I have made a conditional offer on a small place that has more land to grow my trees and shrubs.. I am a landscaper and this compliments my services.
3. The down payment required for the new place is 25% + a cosigner.
4. At 20-25% down payment I see why i've only had one visitor in the past 5 weeks!?
5. I just need to rant and understand why the powers that be opted to demand higher down payment instead of reducing what people purchase with their buying power.. for example, the old rule for renting is don't spend more than 25% of your income. Yet when it comes to buying, bank will allow you to spend up to 40%... putting more people in a situation of difficulty when hard times come(and i do believe we have not seen the worst yet).

So I'd really like to hear from some finance savvy people as to why making purchasing a house more difficult for lower middle income individuals/families/first time buyers makes more sense than a reasonable down payment, lets say 10%, but also reducing the maximum buying power.

OK, here goes...

Less than a 20% down payment is generally a really bad idea. Let's see why.

Assume that you buy a $500,000 house with a 5% down payment. Let's even ignore closing expenses for the moment. Also assume for a minute that the buyer has a further $10,000 in net worth. Also assume that there are no other loans outstanding. Please note that this is likely to be unrealistic in that many who make the smallest possible down payment also have other loans - often credit cards.

Let's look at the numbers for a minute.

Assets:
- House "worth" $500,000
- Further worth of $10,000

Liabilities:
- Mortgage of $475,000

Net worth:
- $35,000

Now, this persons entire net worth can be wiped out with a simple 7% drop in real estate values. This is an incredibly dangerous situation. Even worse, if the owner found himself in the situation where the house had to be sold (job loss, or transfer), the 5.65% real estate commission (don't forget the HST!) plus 2% or so of assorted closing costs will wipe out his entire net worth even if the market didn't drop a dime.

And this is not even counting the costs of purchasing the house (legal, land transfer tax, moving expenses), which will make the situation considerably worse.

This is the problem with margin (using borrowed money to buy an asset). In this example, the house owner has an asset (the house) that is valued at 14.3 times his net worth. This means that for every 1% fall in the price of real estate, he loses 14.3% of his net worth. Sure, it also means that for every 1% increase in real estate values, his net worth increases 14.3%.

In case you haven't been paying attention, even the banks are now saying that real estate is on the cusp of dropping various values of 10% plus. I would say that right now, the probability of falling house prices is extremely higher than continuing increasing prices.

And this is with mortgage rates still at historical lows. If interest rates even increased by one percentage point, then house prices would be falling at least 20%.

My first house, I was required to make a 20% down payment, and my mortgage rate was 12.625%. It was (much) higher than that just a few years before I bought.

No, it isn't a case of the "mean old powers that be" putting the screws on buyers. It is simply the start of a return to sanity. Expect things to get a lot more sane in the next couple of years.

It's not a case of "making houses unaffordable", it's trying to stop lending to people who cannot afford to buy in the first place.

So many points that I could make here...

People realize that cheaper products make for a better life. You will find 100% agreement in this. Except, for some bizarre reason, with houses. People seem to think that only increased house prices will make life better. BALONEY! It is better if people can afford housing, so it is better to have houses cost less, not more. Government is screwing things up by trying to make buying "cheaper" for people. In at least 99% of the time, any action taken by government will have the exact opposite effect of the stated goal.

Also not to mention that renting is far (in many places far, far, far) cheaper than owning right now. People who cannot afford to buy a house should be renting. Period. There is absolutely nothing wrong with renting living accommodations. I am renting, and will buy when it makes sense. It most certainly does not make sense now.

Think of it this way. I come to you looking for a loan. I want to buy something that I really can't afford, so I want you to take the risk and loan me some money. I am extremely likely to lose money in the deal. With very little of my own money in on the deal, there is a very real chance that I will just walk away the second that it looks like I will lose. And I won't even consider far cheaper alternatives to buying. And oh yeah, I will pay you about 3.5% for all of the risk that you are taking on.

Would you loan me the money? Be honest.

[MortgageQueen]

Would I lend you the money? . . . . No.

But if I were a bank that could lend you the money and the government fully insured it? . . . Probably.

That's the crazy world we live in.

[brunt]

But if I were a bank that could lend you the money and the government fully insured it? . . . Probably.

And that is a prime example of government screwing things up.

If the bank will not risk their own money, why the heck should the government risk the taxpayers' money?

It's a good thing (in the eyes of most people) that I am not in charge of these things. There would be no government backed mortgages in my platform.

If there exists a business case for insuring mortgages, then let people put up their own money, not tax money.

[ashedfc]

We have exceeded the saturation point of housing sustainability, & its being held up by reckless Govt. policies (via CHMC), the correction (whenever it happens) will be very nasty for those who have borrowed beyond their capacity.
& for sure it will happen.... the debt based system cannot continue beyond a tipping point (by every passing day, we are getting close to it).
Garth Turner has a blog www.greaterfool.ca worth a look..

[BC Gal]

Sorry but I don`t understand why you would need 25% down and a co-signer unless it is a private sale. Some people re-mortgage their house and have to have a certain amount of $$$ before they can sell it which is the only explanation I can think of for this scenario. CMHC (Canadian Mortgage & Housing Corp) I think still have first home buyers % down as 5%. After that, I thought it was 10%. From what I have learned over the years, I would never go through a private sale as they are usually done to hide something more often than to save money. Maybe find a nice real estate agent who can keep their eye out for the right place for you

[primal]

@brunt, I do agree with most of what you are saying but the way I see it is that IF the banks would be lending more reasonable amounts vs. income which in my opinion they are not, larger downpayments would not be as necessary because the risks would be lessened. I am NOT saying reduce the required downpayment without reducing the amount of the purchase. Yes people want to buy 'the better house' but if we are limited to 25% of the household income(instead of the 39% which it is now, if i'm not mistaken), we'd have to settle for that.
I know it's not about to change anytime soon but what i am surprised at is how nobody seems to be advising people to buy for much LESS than what the banks say they can borrow.
And my answer to your question is yes i would still lend you money to buy a house, but not the amount you are asking me for... If you really wanted to buy a house would you refuse my offer?

[primal]

Sorry but I don`t understand why you would need 25% down and a co-signer unless it is a private sale. Some people re-mortgage their house and have to have a certain amount of $$$ before they can sell it which is the only explanation I can think of for this scenario. CMHC (Canadian Mortgage & Housing Corp) I think still have first home buyers % down as 5%. After that, I thought it was 10%. From what I have learned over the years, I would never go through a private sale as they are usually done to hide something more often than to save money. Maybe find a nice real estate agent who can keep their eye out for the right place for you

I haven't had a chance to speak to my bank about the reasons yet, but it isn't a private sale. I am sure it has more to do with my declared income for the past 2 years while i was in school.. I also dont feel too pressured to find out more yet since i have not had any visits to see my house yet

[Zonny]

Yes, I still live there! I didn't buy a 325k condo lol, I got a 190k condo, didn't feel comfortable with a 2000$ monthly payment!

I put 20% down and got a 1.7% rate (riiiight after the economic crash)

I am planning on keeping the condo to rent it, and buying a house for March-May next year. As you said, I need a 20-25% cash down for that, so it takes time.

When I was studying, Desjardins bank was willing to lend us students loans and the amount varied depending on the field of study. In my field, (pharmacology) they were willing to lend us up to 100k a year. One of the guys in my program was living the life! Bought a new car, bought everyone drinks, went on vacation in the south etc. After graduating he told me he had taken these loans and now had 20 years to pay them back. How can you lend a 19-21 years old person so much money!

Even for us folks who were 30+ and gainfully employed when we were looking, I thought that the bank was willing to lend us WAY more than we could reasonably afford in a mortgage. We qualified for a mortgage of more than twice the amount we ended up spending. Nine years later, that mortgage remains our only debt, and in another ten years (depending on mortgage rates), it will be at least close to being paid off if not totally gone. Just in time to send our DS off to university!

[brunt]

@brunt, I do agree with most of what you are saying but the way I see it is that IF the banks would be lending more reasonable amounts vs. income which in my opinion they are not, larger downpayments would not be as necessary because the risks would be lessened. I am NOT saying reduce the required downpayment without reducing the amount of the purchase. Yes people want to buy 'the better house' but if we are limited to 25% of the household income(instead of the 39% which it is now, if i'm not mistaken), we'd have to settle for that.
I know it's not about to change anytime soon but what i am surprised at is how nobody seems to be advising people to buy for much LESS than what the banks say they can borrow.

Actually, I believe in limiting the amount borrowed relative to income as well. I didn't address that issue as it was not part of the original post. But where you and I differ, is that I believe that this is an additional limit, not replacing the down payment limit. This is due to the fact that they two limits protect the lender from two different areas of potential problems.

Limiting the amount of the loan relative to the borrower's income protects the bank from the possibility of interest rate changes, and partial loss of borrower's income. This is a very good protection to have in place, especially since interest rates are very likely to increase (they should be in the 6% range now, but that's another story altogether), and unemployment is likely to increase in the next few years.

Making the minimum down payment in the vicinity of 20% also protects the bank in a couple of ways. First, it protects the borrower from the effects of excessive margin - like in my original example where the borrower's net worth decreases at a far faster rate than the decrease in values of real estate due to a low down payment. The second area that it protects is from the borrower being tempted to try a Strategic Default. A strategic default is a situation where a borrower would be financially better off financially to simply mail the bank the keys to the house rather than continuing making the mortgage payments - even if the owner could theoretically still keep up the payments. This case typically happens where the home owner is "underwater" on their mortgage - their outstanding mortgage is for an amount that is higher than the house is worth. While I personally consider the practice to be abhorrent, you cannot blame the borrower from using a legal means to protect their own financial interests.

The clincher here, is that it is more difficult to find oneself in such a situation with a larger down payment. It takes a far larger fall in real estate values to make a given house underwater if there is a larger down payment made on the house. With more "skin in the game", the home owner is much less likely to unilaterally decide to make their losses the bank's losses by walking away from the house. It is a very expensive proposition for a bank to foreclose, and so it is in their best interest to avoid it altoghether by requiring the buyer to post a higher deposit on the purchase of the house.

What has happened recently, is that all of these rules were thrown out the window. Low down payments were not only allowed, but actively encouraged by the banks. Loan to income ratios are now in the stratosphere. Those with money to be made from selling real estate (banks and real estate agents) have also emphasized the carrying cost of the loan to income ratio, which is a fine additional limit to have, but at insanely cheap 3% mortgage rates, it is a very dangerous practice to have this as the only metric to use.

So, in closing, I never intended to imply that loan to income ratio is not important, but I maintain that a high down payment is just as vital a thing to require of a potential buyer.

And my answer to your question is yes i would still lend you money to buy a house, but not the amount you are asking me for... If you really wanted to buy a house would you refuse my offer?

I will nitpick here and claim that you have effective said "no" to my previous question. You did not want to finance the low down payment loan. That is because it does not make any sense, and you, quite rightly I will say, see that as being the case.

The only place where you and I differ is that I would be more stringent in requiring a high down payment in order to protect myself from the possibility of having to foreclose on a house in case of rising interest rates or falling real estate values.

[primal]

Thing is i have known so many people who have bought at zero to 5% down, myself included, but didn't buy the biggest/best with what the bank would lend them. 2 things to note here is that with zero down on a very affordable place is quite easy to manage as my case is. The other thing i noticed with friends and family, most of them borrowed the 5% for the downpayment, even that makes the whole purchase riskier because all of a sudden they have 2 debts instead of one.. and nobody tells the bank they borrowed the down payment but i bet you money most people do, or at least a very large number do.
So far neither myself or my friends have had their house repossessed so it will take a lot more to convince me that 20% is actually necessary and that is especially true for applications for modest mortgages.

[allrnvus]

its becoming harder and harder for the young generation to purchase a home. However i have a few friends that are in real estate and they say that the market is slowing down. That if your looking to buy you should wait. prices may come down.