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Mortgage Broker News | 24 Apr 2015, 08:01 AM Agree 0
One Toronto-based business school professor is sounding the alarm for high ratio homebuyers.
  • James Robinson | 24 Apr 2015, 11:42 AM Agree 0
    Drawing conclusions based on generalities and averages is a dangerous business. Everybody who buys a house with less than 20% down is financially irresponsible, unable to save, and destined to spend more than their income every year. This seems to be the message from Mr Milevsky. I agree that people who cannot save or spend within their means should not buy a home, but this does not include all buyers who take a high ratio mortgage.
    He also discuses the idea that the insurance paid by the borrower protects the bank and not the borrower and while this is technically correct, if you look deeper you realize that the bank is lending out depositor's and investor's money so this insurance really protects them from losses in the grandest scheme of things.
    Whether you own or rent with or without a mortgage, if you always spend more than you have, you will continue to fall into a deeper hole. I suppose that those individuals that do this say "if it is good enough for my government it is good enough for me".
    I have lots of clients that are very financially responsible and still cannot come up with a huge down payment but live their life without ever carrying a balance on a credit card and without big car leases and unsecured debt.
    Like any investment you only realize a gain or loos if you dispose of the investment, so if real estate corrects it doesn't mean everyone is suddenly homeless or bankrupt.
    Do the math on a 25 year amortized mortgage at current 5 year rates and you will see that over half of your very first payment is principal and it only gets better from there. That is what I refer to as forced savings and while refinancing does occur, those with less than 20% equity cannot refinance (unless they go private). Rent is 100% paid to the landlord yet a mortgage payment is half rent to the bank and half savings into your "equity" account.
    I would guess that if you looked at all 55 year olds in Canada, those that are homeowners would have a higher net worth than those that are not...it is easier to spend your savings than to spend your equity.

    I realize that my opinion is biased as I am in the mortgage business, however, I believe in a balanced approach to growing wealth. Buy stocks, real estate, have some cash, and never ever carry a balance on a credit card.
  • Mortgage Delivery Guy | 24 Apr 2015, 02:47 PM Agree 0
    Interesting article & comment indeed.
    In my opinion its not right to generalize the fact that all high ratio mortgages are destined to doom.
    Like any other financial decision, appropriate risk assessment & contingency plan ensures the safety of any investment.
    Real estate is also the same. When we claim realestate to be the best investment vehicle in terms of better returns, on the contrary the mistakes permitted with this investments vehicle also tend to be a bit more painful.
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