Mortgage Matters: More Risk Tolerance
Mortgage Matters: More Risk Tolerance
By Bob Quinlan
Wednesday, December 31, 2008 03:49 AM
Now how much risk tolerance do you have as a borrower?
I have heard many people tell me: “why does the bank think I can’t afford this?
Answer: Because the bank wants to make sure you are not exceeding your level of “risk tolerance.”
The guidelines and limits they use to try and approve a loan for are not just because they want to make money from your loan. The only make money as long as you can repay the loan.
Those of you who read my last entry (December 11th) should have been able to understand that mortgages are designed to be a “win/win” situation. If you succeed in making your required mortgage payments, you not only own your own home but you also gain from the market appreciation. Historical data will show that over the past 50 years the average real estate market decline has lasted less than eight months, while the average increase has lasted more than 42 months. Add to that the average decline has been less than 15% while the average increase has been more than 70%. There will always be ups and downs. The key is to be able to survive the downs so you can benefit from the ups.
Everyone needs a home to live in. Therefore residential real estate values are the life blood of our economy. The trick is to be able to weather the storms. Go ahead and buy at the peak of a market. As long as you can get to through the tough times you will be able to coast in the better times. That is why we all need to determine our level of “risk tolerance”.
Many people I talk to have come from the school their parents and grandparents were raised in. “Pay off your house and you will be safe. You will always own your home and no one will be able to take it away from you.” That’s fine as long as you don’t have any other debt. Credit cards, lines of credit, vehicle loans, student loans, etc. Prior to 1970 credit card debt was virtually non-existent. Then CHARGEX came along. That was changed to VISA and MASTERCARD and American Express was added. Instant gratification. You can have what you want now and pay for it later. The expansion of credit allowed the economy to grow and flourish. Goods were traded on the promise of payment tomorrow. Businesses grew and with that the promise of more jobs turned into higher incomes, the assurance that mortgages could be paid, demand for better housing and the rise in property values.
Of course, what comes with that is the inevitability that some people will exceed their “risk tolerance level” and default on their debts. Their desire to own a home and all that goes with it overshadowed their ability to make the payments. That usually happens when the market goes into a decline and as I explained earlier the value of their home is less than what they owe. Foreclosure and bankruptcy.
The evolution of credit over the last 40 years has changed the way we should be thinking about the ownerships of our homes. For the most part, we need debt to grow financially. We just have to choose the proper type of debt that enhances us and doesn’t drag us down. We need to be able to manage our expectations and ultimately the level of our debt (our risk tolerance). Are you managing your debt or is your debt running you?
Our parents and grandparents never had the extra debt other than the mortgage on their home and maybe the loan on their vehicle. These were secured by the lenders who could seize those assets if the loan wasn’t paid and they were able to get all or most of their money back. That process of seizure was swift and heavily in the favour of the creditor (bank) so the fear of losing your home was great. If your home was paid for (clear title) then since you probably didn’t have any other debt, your home was secure.
Now fast forward to 2008. Let’s say you have your home paid for and you are keeping it that way because you learned from what your parents taught you. However, you have a couple of credit cards, a line of credit and vehicle loans that you are paying on. Say you fall behind and can’t keep up the payments. Do you really think having your house paid for is going to save it? When push comes to shove what do you think your creditors are going to do? Force you to mortgage or sell your home maybe? Your credit is now shaky from the late payments so what are the chances of getting a mortgage on your home at a reasonable rate? That leaves a “high risk” lender (because you have become a “high risk” borrower) at an outrageous rate that isn’t much better than the payments you haven’t been able to keep up in the first place. It’s easy to say one shouldn’t have gotten into the debt in the first place, but sometimes life just isn’t that easy. Stuff happens. Maybe you should have considered a more manageable payment to cover all the debt with a mortgage on your home.
This is why using your home is the safest form of debt. The security is highest so the interest rate is the lowest. The life of the security is long term therefore the payments can be spread over a longer term (up to 35 years in most cases) and are more manageable. Over time your house value should always increase therefore as long as you are making your payments, your equity (cash value) will continue to grow (tax free).
The bottom line is:
1. If you have debt you will have to repay it.
2. Manage it so it can be repaid at the lowest cost (interest rate).
3. Protect yourself from setbacks (loss of income) by having the lowest payments available if needed. (make sure you have the option to accelerate your payments without penalty).
Once again, thank you for taking the time to read my comments. I hope they helped. And I would like to wish everyone a happy, healthy and prosperous 2009.
Bob Quinlan is a Mortgage Broker with Mortgage Alliance Prince George, you can reach him by email :bob@pgmortgages.ca or by calling the office at 250-564-9161
November Sales Drop for the BC Northern Real Estate Board.
Saturday, December 13, 2008 05:14 AM
Prince George, B.C.- The BC Northern real estate Board which includes Prince George, reports that year to date sales of residential units are down 25% compared to January to November of last year.The B.C. Northern Board also indicates the average price of a home is up 10.5% as of the end of November, compared to the same eleven months in 2007.
Provincially, the story is a little different as residential sales were down 62 per cent to 2,707 units during the January to November period. The average MLS® residential price in the province was $395,687, down 12.5 per cent from November 2007.
"The average sale price of a home in the province hit a 26-month low in November," said Cameron Muir, BCREA Chief Economist. "The irony of markets is that there’s no shortage of buyers when prices are near a peak and a scarcity of buyers when prices are near a trough." Home prices were 8 per cent lower in November 2008—nine months after the peak—than they were nine months prior to the peak.
ReMax says house prices to fall
By Brenda Bouw - THE CANADIAN PRESS
VANCOUVER — Housing prices will fall about five per cent across Canada by the end of 2009 as the slumping economy takes a bite out of consumer confidence, says the ReMax realtor company.
The biggest drops are expected to come in major cities in British Columbia, where prices have run up the most across Canada in recent years, and in parts of southwestern Ontario hit with automotive and manufacturing job losses.
Some economists believe the predictions are too conservative, estimating housing prices to fall by closer to 10 per cent across Canada next year alone, led by big drops in B.C. and Saskatchewan.
In a report released Wednesday, ReMax said Canada’s average house price has retreated from 2007’s record high and will fall three per cent this year to $300,000 and another two per cent next year to $293,000. National prices peaked in 2007 at an average of $307,265.
About 440,000 homes are expected to change hands across Canada in 2008, a drop of 15 per cent compared to 520,747 last year. ReMax predicts 2009 sales to be flat.
“The reason for that is purely consumer confidence, it’s shaken terribly right now,” said Elton Ash, a ReMax regional vice-president located in Western Canada.
“There are a lot of questions over job prospects right now.”
The three per cent overall drop in prices predicted for 2008 comes despite gains in 22 major centres across Canada, with the exception of Calgary and Edmonton, where prices are expected to fall one per cent.
Ash said the national drop is driven by smaller centres, such as forestry, oil and gas, mining and manufacturing towns hard hit by a downturn in the economy that has resulted in layoffs and stalled project development.
In 2009, the largest drops are expected in both Victoria and Kelowna, B.C., where prices are predicted to fall 10 per cent in 2009 to an average of $440,000 and $378,000 respectively.
Prices in Vancouver, Canada’s most expensive housing market, are predicted to slump seven per cent to an average of $545,000 next year. They are expected to peak in 2008 at $585,000, a two per cent increase from last year. Home prices in Vancouver have fallen 12.8 per cent in Vancouver between May and November this year, after climbing more than 50 per cent since 2004.
“B.C. had the biggest runup in prices nationally in recent years,” Ash said. “When you have that happen there is going to be a greater down cycle.”
The Kitchener-Waterloo, Ont. region is predicted to see house prices drop seven per cent in 2009, to an average of $250,000, followed by a four-per-cent drop in the nearby Hamilton-Burlington, Ont. region, to $268,000. Both areas are impacted by a downturn in the automotive and manufacturing sectors, which have laid off thousands of employees in recent months.
The Greater Toronto area, which includes manufacturing and the struggling financial services sector, is predicted to see a drop in house prices of two per cent to $376,000 next year. In 2008, Toronto house prices are expected to climb two per cent to an average of $384,000, which is a 22 per cent increase since 2004.
House prices in St. John’s, N.L. are expected to jump 12 per cent in 2009, which ReMax says is due to the “(Newfoundland Premier Danny) Williams effect on the overall economy.” That follows an expected 21 per cent price increase in 2008.
In Regina, prices are estimated to rise nine per cent next year, while cities such as Ottawa, Edmonton, Calgary, Sudbury and Halifax are predicted to see prices remain flat next year.
Benjamin Tal, an economist at CIBC World Markets, said he sees house prices dropping by about 10 per cent across Canada over the next 12 months.
He predicts the resource rich provinces of B.C. and Saskatchewan will lead the fall with price drops of 15-to-20 per cent next year in part due to the drop in commodity prices, a reversal that is already playing out in oil towns such as Calgary and Edmonton.
“It’s not pretty, but it’s not a crisis,” said Tal.
“This is recessionary fall in the housing market, this is not a subprime housing meltdown.”
Adrienne Warren, a senior economist at Scotiabank, predicts national house prices to drop by five to 10 per cent in 2009.
“The big risk to the Canadian housing market right now is a more significant recession and more significant job losses as opposed to mortgage-specific related problems we are seeing in the U.S.,” Warren said.
“The price declines are driven by more supply and fewer buyers.”
The U.S. housing market crashed last year as a result of reckless lending practices that covered about one-third of mortgages. They eventually defaulted, which led to the toppling of the housing market and several financial institutions who backed the risky investments.
Merrill Lynch said recently that it believes Canada’s housing market is following the same troubled path that eventually led the US. market into a major downturn, but with a two-year lag. It said Canadian households are so deeply in debt that a “tipping point“ is approaching for the overall real estate market.
Many economists, as well as the Canadian real estate industry, disagree the market here will be as bad as in the United States, where prices have fallen 20 per cent since the peak in mid-2006, and are expected to fall another five per cent next year.
It its outlook released this week, the Canadian Association of Accredited Mortgage Professionals predicts mortgage approval activity (including new mortgages, transfers and refinancings) to fall nearly 12 per cent to $193 billion in 2008, compared to $218 billion in 2007.
Approvals are forecast to fall another 10 per cent to $174 billion in 2009 and another 1.6 per cent in 2010 to $171 billion. That follows a growth rate of about 11.5 per cent annually for the three years ended August 2008.
