4 ms·

I'm completely unfamiliar with the Canadian real estate market, but where I live your ability to get a loan depends on your income and ability to pay the loan.

by avar 10y ago

I'm completely unfamiliar with the Canadian real estate market, but where I live your ability to get a loan depends on your income and ability to pay the loan. Given that, why does it matter if someone in Canada had a $200K home and the market dropped 30%, v.s. someone who had a $2M home and the market dropped 30%? Surely their earnings were priced into the loan? Or is the Canadian real estate/loan market so insane that nobody asks you if you can plausibly pay for the loan you're taking?

refurb 10y ago
Generally, you are correct. However, you need to take into account someone's down payment. If you're making $300K per year and you buy a $1M house, then yes, a loss of $100K-$200K is probably manageable. However, a lot of people don't make that much money. What they did is scrap together a down payment, sometimes borrowing from Mom or Dad. They get a mortgage payment they can just afford on a salary of $100K. The other thing that happens is that some people will get a 2nd loan to cover the down payment requirement. There are regulations against it, but it does happen.
- brianwawok 10y ago
  You are going to be hard pressed in the US to get a loan for more than 4x annual salary with 20% down. Unless you are borrowing 500k for a down on a 1 million dollar house.
  - phamilton 10y ago
    Guidelines for confirming mortgages allow a 38% household DTI ratio. So a $1M home with $800000 loan comes out to around $5000 (3.875% ARM), putting minimum income at $160k. So 5x salary with 20% down.
    - MichaelBurge 10y ago
      The government-backed mortgages are capped below $1M though, aren't they? I thought jumbo loans were portfolio loans, so government criteria didn't apply.
distances 10y ago
AFAIK the problem often is that the home is collateral for the loan, and when prices fall the bank demands more collateral to match the loan (even if you could still pay your monthly payments). If you can't pony up, the bank may take over and sell with the current (lower) price. You're left with no home and still have to pay the part of the loan that remains due to price difference. Disclaimer: not sure this is how US/Canadian mortgages actually work, but this screwed lots of people in a certain financial crisis I know of.
- refurb 10y ago
  I can confirm that Canadians banks do this, but I'm not sure if it happens all the time. One of the biggest differences between Canada and the US is 30 year terms for mortgages. They are standard in the US and allow you to lock in a fixed rate for pretty much the rest of your life. In Canada, they still do 30 year amortization, but loans are typically 5 year. You can get 1 year sub-prime loans with very low rates or 10 year fixed with higher rates. The 5 year is the most common. What this means is that you don't get to enjoy a fixed rate over your lifetime. Get a mortgage for 4%? Great, it might be 7% 5 years from now. In other words your monthly payment could increase substantially. Since you need to reapply for a mortgage in Canada, the banks will reassess the value and make sure you have enough collateral. I have heard of people refinancing after a downturn and the bank asks for another $5K to $20K to make sure you have the minimum 20% equity.
  - SimonPStevens 10y ago
    This is exactly the same problem as the UK housing market. Mortgage loans typically have 2-10 year periods of discount or fixed rate (with the lowest interest rates normally found on the 2 year plans), then they revert back to the 'standard variable rate' which is significantly more expensive, and subject to change at very short notice. To keep a low interest rate you have to reapply for your mortgage every few years to get a new deal, and with reapplication comes the requirement to have a certain percentage of equity to loan.
forgetsusername 10y ago
Lending is pretty lax, just like it's been in spots all over the planet for over a decade.
wmil 10y ago
One of the problems is that Canadian banks will make loans to foreigners with no credit history if there's a decent down payment. The banks typically demain that Canadian borrowers get a federally insured mortgage, which involves checking your income and credit history. So it's actually easier for foreigners to speculate on real estate in Canada. One of the problems is that if a foreign owner ends up underwater after a correction they can easily just walk away.

by avar 10y ago

refurb 10y ago

Generally, you are correct. However, you need to take into account someone's down payment. If you're making $300K per year and you buy a $1M house, then yes, a loss of $100K-$200K is probably manageable. However, a lot of people don't make that much money. What they did is scrap together a down payment, sometimes borrowing from Mom or Dad. They get a mortgage payment they can just afford on a salary of $100K. The other thing that happens is that some people will get a 2nd loan to cover the down payment requirement. There are regulations against it, but it does happen.

brianwawok 10y ago
You are going to be hard pressed in the US to get a loan for more than 4x annual salary with 20% down. Unless you are borrowing 500k for a down on a 1 million dollar house.
- phamilton 10y ago
  Guidelines for confirming mortgages allow a 38% household DTI ratio. So a $1M home with $800000 loan comes out to around $5000 (3.875% ARM), putting minimum income at $160k. So 5x salary with 20% down.
  - MichaelBurge 10y ago
    The government-backed mortgages are capped below $1M though, aren't they? I thought jumbo loans were portfolio loans, so government criteria didn't apply.

distances 10y ago

AFAIK the problem often is that the home is collateral for the loan, and when prices fall the bank demands more collateral to match the loan (even if you could still pay your monthly payments). If you can't pony up, the bank may take over and sell with the current (lower) price. You're left with no home and still have to pay the part of the loan that remains due to price difference. Disclaimer: not sure this is how US/Canadian mortgages actually work, but this screwed lots of people in a certain financial crisis I know of.

refurb 10y ago
I can confirm that Canadians banks do this, but I'm not sure if it happens all the time. One of the biggest differences between Canada and the US is 30 year terms for mortgages. They are standard in the US and allow you to lock in a fixed rate for pretty much the rest of your life. In Canada, they still do 30 year amortization, but loans are typically 5 year. You can get 1 year sub-prime loans with very low rates or 10 year fixed with higher rates. The 5 year is the most common. What this means is that you don't get to enjoy a fixed rate over your lifetime. Get a mortgage for 4%? Great, it might be 7% 5 years from now. In other words your monthly payment could increase substantially. Since you need to reapply for a mortgage in Canada, the banks will reassess the value and make sure you have enough collateral. I have heard of people refinancing after a downturn and the bank asks for another $5K to $20K to make sure you have the minimum 20% equity.
- SimonPStevens 10y ago
  This is exactly the same problem as the UK housing market. Mortgage loans typically have 2-10 year periods of discount or fixed rate (with the lowest interest rates normally found on the 2 year plans), then they revert back to the 'standard variable rate' which is significantly more expensive, and subject to change at very short notice. To keep a low interest rate you have to reapply for your mortgage every few years to get a new deal, and with reapplication comes the requirement to have a certain percentage of equity to loan.

forgetsusername 10y ago

Lending is pretty lax, just like it's been in spots all over the planet for over a decade.

wmil 10y ago

One of the problems is that Canadian banks will make loans to foreigners with no credit history if there's a decent down payment. The banks typically demain that Canadian borrowers get a federally insured mortgage, which involves checking your income and credit history. So it's actually easier for foreigners to speculate on real estate in Canada. One of the problems is that if a foreign owner ends up underwater after a correction they can easily just walk away.