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Until the music stops. See how much those condo's sell for during the next downturn, if you can even sell them.

mikekchar 8y ago
If interest rates go up causing people not to be able to afford their payments, those condos will sell -- after the mortgages have been foreclosed. Was in London in 1992, just before the pound was removed from the European exchange rate mechanism. Very instructive. Now is a particularly dangerous time to overextend yourself on a mortgage. For any realistic scenario, interest rates will never be lower than they are now. People ridiculously short terms on their mortgages (like 5 years or less). On top of that they are encouraged to take floating rates to shave a little bit off. If you end up with $1 million in debt and the interest rate jumps up to 5% (or 10%... or like London at the time I was there -- 18%!) what will you do? Of course you will have no choice but to default on your loan. House goes into a fire sale, but nobody can afford it with the higher rates, so it's sold for 10% or 20% or even 30% less than the original mortgage... And now, that's the price of houses -- Virtually everybody is more than $100K underwater at that point meaning that if you miss a payment, personal bankruptcy is probably your only hope. Of course, it may not happen in our life times. That's the tricky bit.
- RhodesianHunter 8y ago
  Does anyone get floating rate mortgages any more? I thought (could be very wrong) that these had mostly gone the way of the dodo due to exactly what you're describing.
  - mabbo 8y ago
    In Canada, most mortgages have to have their rate renegotiated every few years. For example, mine was amortized over 30 years, but on a five year rate. When five years are up, I have to renegotiate an interest rate. "Renewing" the mortgage. This has interesting properties economically. It's a bit like a floating rate in that it will change, but like a fixed rate in that you don't have to worry about next month having an unexpected high bill. The banks give better rates because they only have to estimate the near-future and not the next 30 years. Big question: what happens when all the people who could barely afford their mortgage five years ago come to renew with rates higher?
  - nasalgoat 8y ago
    In Canada, you have the option of taking a fixed rate or variable rate mortgage, with the latter offering a more attractive rate (for example 3-year fixed was 3.14% while 3-year variable was 2.85%). You can roll the dice on increasing interest rates but I locked in on a fixed rate because I knew the rates would be going up 3-4 more times in the next 3 years.

If interest rates go up causing people not to be able to afford their payments, those condos will sell -- after the mortgages have been foreclosed. Was in London in 1992, just before the pound was removed from the European exchange rate mechanism. Very instructive. Now is a particularly dangerous time to overextend yourself on a mortgage. For any realistic scenario, interest rates will never be lower than they are now. People ridiculously short terms on their mortgages (like 5 years or less). On top of that they are encouraged to take floating rates to shave a little bit off. If you end up with $1 million in debt and the interest rate jumps up to 5% (or 10%... or like London at the time I was there -- 18%!) what will you do? Of course you will have no choice but to default on your loan. House goes into a fire sale, but nobody can afford it with the higher rates, so it's sold for 10% or 20% or even 30% less than the original mortgage... And now, that's the price of houses -- Virtually everybody is more than $100K underwater at that point meaning that if you miss a payment, personal bankruptcy is probably your only hope. Of course, it may not happen in our life times. That's the tricky bit.

RhodesianHunter 8y ago
Does anyone get floating rate mortgages any more? I thought (could be very wrong) that these had mostly gone the way of the dodo due to exactly what you're describing.
- mabbo 8y ago
  In Canada, most mortgages have to have their rate renegotiated every few years. For example, mine was amortized over 30 years, but on a five year rate. When five years are up, I have to renegotiate an interest rate. "Renewing" the mortgage. This has interesting properties economically. It's a bit like a floating rate in that it will change, but like a fixed rate in that you don't have to worry about next month having an unexpected high bill. The banks give better rates because they only have to estimate the near-future and not the next 30 years. Big question: what happens when all the people who could barely afford their mortgage five years ago come to renew with rates higher?
- nasalgoat 8y ago
  In Canada, you have the option of taking a fixed rate or variable rate mortgage, with the latter offering a more attractive rate (for example 3-year fixed was 3.14% while 3-year variable was 2.85%). You can roll the dice on increasing interest rates but I locked in on a fixed rate because I knew the rates would be going up 3-4 more times in the next 3 years.