“My in-laws recently bought into a townhouse development that completes in April. They are both accountants. Their gross household income is around 100k. I just found out the details of the purchase…”

“My in-laws recently bought into a townhouse development that completes in April. Their gross household income is around 100k. I just found out the details of the purchase:
Price of unit: 540,000
Downpayment: 108,000 (20% to avoid having to pay CMHC insurance)
Mortgage amount: $432,000
Now for the sub-prime part:
Downpayment came from 3 sources:
1) 25,000 came from parents’ HELOC.
2) 80,000 came from a line of credit from a major Canadian bank (WHO THE F*** GAVE THEM THIS MONEY AND WHY???)
3) 3,000 came from their own savings.
So, while boasting that their mortgage payments are *only* 1800 a month, they also intend to pay down their line of credit at a rate of $1,000 a month for the next 6.66 years, as well as make interest only payments on their parents’ HELOC. Oh, and they also intend to move out 5 years later in order to buy a house so they can have kids while she goes on maternity leave. So, in order to minimise the interest paid on the purchase, they aim to throw every spare penny into paying off the mortgage sooner.
They are both accountants.”

TPFKAA at vancouvercondo.info 25 Mar 2012 3:39pm

UPDATE: TPFKAA notifies us of an error in the story and sent this correction via e-mail and a comment in the thread below:

“ERRATUM:
RE: this story.
Damn it. I knew the story sounded too sensational. So it turns out I was misinformed by a family member. In the interests of journalistic integrity, I have to issue a correction or I could not sleep at night.
In fact, the couple DID have 30,000 stuffed away in RRSPs. Their downpayment was actually 140,000. All other details are the same. So, they put in 30,000 of their own money, 80,000 from a LOC and 25,000 from parents`HELOC.
In some ways this makes the situation worse. They now have to pay back each year the taxes on the RRSP withdrawal, as they will not be repaying them in the next ten years. So on the amount they are supposed to pay back in, they will have to pay taxes instead.
Moreover, they have their actual savings on the line in the event of even a minor correction.
I guess this is technically not a sub-prime mortgage, then. More like a sub-optimal financial decision.”

– TPFKAA

44 responses to ““My in-laws recently bought into a townhouse development that completes in April. They are both accountants. Their gross household income is around 100k. I just found out the details of the purchase…”

  1. Renters Revenge

    Sounds like a great way to relax, feel comfortable, and enjoy the BPOE.

  2. LandlordRescue.ca

    Wow I guess they’ll be eating air because that’s the only thing they can afford.

  3. Basement Suite

    “2) 80,000 came from a line of credit from a major Canadian bank (WHO THE F*** GAVE THEM THIS MONEY AND WHY???)”

    Because big banks know that until mortgage rates rise substantially above the sub-3% they are today, there will be no serious crash here. And there are no plans to do so for a very long time.

    • No serious crash ? The latest Schiller Index indicates that Seattle and Portland prices are now down 30% from their peak.
      Good thing it’s different in the BPOE and that sort of a decline will never happen.

      • Basement Suite

        What happened post-2008? People kept buying here. Don’t shoot the messenger. I’d love to see a crash. But until those in power decide to get mortgage rates back to something reasonable, you will not see it in this city. Sub 3% mortgages are holding this thing up. US had already deflated with the last rate spike. Not so easy to blow air back in. But easier to keep it afloat and free money is doing that here. You will get a dip, I expect a correction is underway, but people WILL buy the dip WAY before the 66% off minimum to get us back to fair prices. Am I wrong? I sure hope so.

      • “The latest Schiller Index indicates that Seattle and Portland prices are now down 30% from their peak”.

        that’s it? 30%? US is ground zero for housing crash and all the pacific northwest could come up with is 30%? Doesn’t bode well for a Vancouver 50% given the regional comparison.

      • It’s not over yet, Formula. Recall that Portland and Seattle have come late to the property price declines. Until relatively recently they were both puffed that their cities had missed the correction but have since learned nobody was immune. If anything, we should be even more concerned as the revenue and employment base in Vancouver is weak compared to what our friends to the South draw from.

      • @formula1 – If you check out Seattle Bubble’s analysis, Seattle is back to its historical Case-Shiller baseline; the fundamentals of price to income and price to rent are where they should be overall. There may still be some flux in the upper tier of the market, and I expect a little overshoot on the downside to continue – but Seattle, at least, is a pretty good example of a market returning to fundamentals, and *I would buy there*. I’m a housing bear here, but I’m not anti-real-estate, and there are well valued places in Seattle.

        So Seattle maybe only lost 30% overall, but it only had 30% to lose

        Vancouver, on the other hand…

      • Schiller’s a funny monkey, on one hand he lauds investment banks for “creating” prosperity, and secondly he has no firm opinion on whether this was good or bad, or if housing can recover, or if US is experiencing a false bottom. My take, he sees the path to prosperity through maintaining the tried and true status quo paradigm in the hopes that it still might work. This is one of the clowns who have no idea what a pitch fork alternates as.


        woohoo 22 views!

    • f1. or, same facts and you could think this way … it ain’t over til it’s over and the van comps presage a worse fate. ta-da!

  4. Hypothesis: There’s something about telling people you’re an Accountant that encourages compensatory behaviours [one of my favourite BeanCounters used to ‘holiday’ in Revolutionary Nicaragua – evading Somozan DeathSquads as he drove a truck laden with emergency relief and medical supplies to the ‘front lines’ on behalf of the Sandinistas]…

    In other ‘shocking’ news… A new Candidate!!!! for VREAA’s “JumpTheShark” category…

    [CBC] – Glass-walled condo becomes B.C. stage: Lookie-loo rom-com turns out to be 450-hour condo commercial

    “Three actors are living inside a glass structure in a Surrey, B.C., mall, with just about all their movements broadcast on the internet and watched by passers-by. They are acting in a 450-hour live, online video “drama,” 10 hours per day, over the next six weeks… But it’s not a reality show, or pure drama. It’s all part of a unique commercial effort to sell real estate.”

    http://tinyurl.com/dyphdzj

    • Remarkable.
      Thanks Nem.
      Definitely a ‘jump the shark’ candidate.

    • Un-Bee-Leeve-Able.

      About those accountants making a really, really bad financial mistake……isn’t that a “the surgeon left the sponge in the patient” kind of moment? When the pros screw up this badly then there is little hope for everyone else. Cripes, all they had was 3000 bucks of real money. How idiotic does it get that they bought a half million dollar liability at the top of the market when they really can’t even afford a good riding lawnmower!!!!

    • I suppose it could be argued that, deep down, speculators are patriots at heart, bequeathing their future earnings for the betterment of somethingorother. Or maybe they’re living too much in the moment. Accounting is accounting after all.

      • Ha Ha. Too funny Jesse. Maybe you are right. The fools are doing it for loyalty to their as yet unborn children……you know, the same kids they will never have because the banks ate their babies..

        Oh wait, why am I laughing? This is maybe quite depressing. The score?

        Banks: One
        Humans with hormones (getting sterilized): Zero
        Laughing at the fools as they squander their youth: Priceless

  5. Gross 100k per year and no saving?

    One thing I (and other Asian immigrants) don’t understand is where did these people’s money go?

    Just saying, not judging.

    • Another food for thought that might blow the mind:
      Do I know where my savings are going when I hand them over to a bank? Furthermore, if I knew, would I throw up in my mouth?

    • You ever pay income-tax in Canada? How about GST or HST? Ever pay any capital gains tax? Gasoline tax at the pump? Ever have to pay back a student loan because your mommy and daddy didn’t foot the bill? Ever have to put food on the table for your family? $100K between two is nothing living in a large Canadian city.

      • Come now. Really? I see a ton of people every time I’m in Vancouver (or Calgary, or Edmonton) who make less than that and somehow make a go of it.

      • From experience, $100K is enough. Not for the wesside I guess, and no fancy trips, but… do we want to do a budget and “follow the money”?

      • For sure. 100k is enough to live on. Maybe start saving for a rainy day too. It is not enough to buy a half million dollar pad though with a multiple of 5 times combined gross incomes and still enabling a normal life. This purchase calls for significant sacrifice. Especially if rates rise. It is obvious the plans for a baby will get thrown overboard as soon as times toughen up. Like right after the budget on the 29th.

        What the hell was the point of getting an education, working hard, getting married and buying the house? This is one family dream that just went up in smoke. Very sad.

        Stupid bloody house ruined it all but they are too daft to “get it”.

      • The CBC had a series on Canada’s economy, they brought on an actuary to discuss Canada’s purportedly low savings rate. He stated that for the most part savings rates can be low in Canada due to benefits received in retirement and expenses crowded around the child-rearing years that will ebb as children are cast out into the wilds.

        The fellow further stated that about half of Canada’s population shouldn’t be saving anything; in many cases their net incomes, after all benefits are received, will actually increase in retirement; the articles complaining about low savings rates, he claims, emanate from business sections of papers inundated with financial advisers, banks and their ilk looking to increase their portfolios. Interestingly those predominately reading the business end (as it were) of the paper are likely saving quite handily, well enough for their retirements at current living standards.

        I don’t know if the fellow is right but he did seem nerdy enough to be honest.

      • I can just hear the conversation of this adoring couple in the future. Right after they realize everything they worked for is just a big waste of a life. If you use your imagination you will hear it too……

        Him: “So what should we do now?”
        Her: “We could walk the dog”
        Him “We still have a dog?”
        Her “We aren’t having babies, are we?”
        Him “Is that the kettle boiling…..?”

      • You ever pay income-tax in Canada? Yes
        How about GST or HST? Yes
        Ever pay any capital gains tax? No
        Gasoline tax at the pump? Yes
        Ever have to pay back a student loan because your mommy and daddy didn’t foot the bill? Yes
        Ever have to put food on the table for your family? Yes

      • “I don’t know if the fellow is right but he did seem nerdy enough to be honest.”

        So I’m late to this party 😉 but oh well

        I’m sure he’s very earnest and believes everything he says. But having come from a communist bloc country, “don’t worry, the state will provide” rings rather hollow, and I recommend everyone take that one with a grain of salt.

    • 4SlicesofCheese

      Holt Renfrew? Apple Store?

    • RE: Not judging
      The couple in question are Asian. Their parents immigrated just after their births. They just spent all their savings on a monstrous Asian banquet wedding; no help from parents.

      I have no doubt they have excellent credit and can and will be able to pay off the loans fast. I just don’t think they understand quite how hard it will be on their personal lives to go from taking frequent holidays and buying whatever they want on their double income while living in a $900 basement suite to paying well over $3,000 a month for a home that may be worth less than they owe on it. I also am very sad for them, and tried hard to persuade them to wait and see where house prices go. They firmly believe that the value of their townhome has nowhere to go but up.

      • This story just gets more and more amazing by the moment. So you are saying they spent all their savings on a wedding? They sure are wild eyed dreamers. And now they think they will recover it all in house price appreciation. If only every kids fairy tale worked out so nicely.

  6. I’m sure it will all balance out.

    • If it doesn’t, I’m offering bailout capital at 20%. My guy only needs to inspect your collateral and make sure that you fully understand the terms. Emphasis, fully understand.

      • A dirty little secret of government bailouts: in many circumstances they make money off the deal. I don’t know if that’s in the cards for Canada’s future bailouts, but cash is king and many are in effect paying Canada to hold this cash. Sounds like a pretty good deal in the long run.

      • There’s a headline somewhere. Canucks enjoy haven status as China and US production quotas drop and our resource sectors enjoy low carrying charges with in-ground storage. Hedge now with good natured Canadian household debtors and their array of boutique investment products.
        Asset species: Subridiculi Primeri-eh

      • debtless. more thoughts on your potentially toxic uninsureds, which i am beginning to find … fascinating.
        – path to direct monetization on the front end requires campaign for popular support or ignorance, which may not resolve in time before too many dominoes tip, especially with other external risks, i.e. contagion risk
        – can scalp stock equity holders, junior bondholders, etc. dunno just guessing
        – fed is ready to absorb garbage, if you can get it there, but the fed buying upside-down vanRE? why not, they’ve got all sorts of junk already
        – maybe banks will have gorged enough to take some hit for publicity purposes and not need recapping
        or some combo of all of the above, because who knows how bad it’s going to get. finally, don’t you think somebody has bets on this thing blowing? i’m just too much a neophyte to know how.

      • chubster
        I’m speculating, wondering about a round of QE to commercial/business in US as they try to prop industry. Our Feds and banks scramble for foreign investment to buy concrete with mortgage backed securities. I don’t see a credit crunch, but a borrowing crunch. To deflate or inflate? Stuck between the rising yuan and the sinking US $. Notice they are hot for Asian money.

        YVR real estate? The lender is using mortgage debt as collateral to finance capital projects and sell to foreign investors before prices deflate, or the US devalues our accounts receivable.

      • debtless. follow-up. about 1/2 of mortgages are cmhc, 1/4 genworth and 1/4 uninsured. also, can only has 5 yr terms – this is important. so, the banks are better positioned vs homeowners than usa, and maybe will not need to push for asset relief program.

      • Chubster
        Yes, this falls in line with BMO strategy to amortize in 25, and lower rate a last bit, they want buyer to pay down quickly, forfeit their own equity first, letting the bank hide behind principal.

        “This growth period was a very heated one in the commercial real estate markets where many mortgages were financed at property values that were likely much higher than they are today. Keep in mind that the majority of these mortgages carry 5-year terms, meaning that there should be $4-5 billion of institutional commercial mortgage debt maturing in each of 2010-2013.” 2009 figures on commercial http://base10capital.com/archives/405

        “Initiatives we have taken under Canada’s Economic Action Plan have certainly helped create a better climate for investment, but we must do more,” he said. “We need to focus our attention where it really matters — on big projects with the most significant impacts on the environment and work to mitigate those impacts. We want a regulatory system that protects Canadians and promotes environmental stewardship, while supporting Canada’s competitive advantage.” Read money for production from foreigners. gov action plan http://actionplan.gc.ca/eng/media.asp?id=5159

        Check out chart c-7 on the right. Same cycle only this time it’s a borrower crunch – arrow B http://www.brandnewlaw.com/ww3/2-C.htm

        My feeling? We head back to production and disengage from the consumption model. I foresee production jobs, low rent, and conservative savings in our children’s future. They only want love and an ipad anyway.

  7. ERRATUM:

    RE: this story.

    Damn it. I knew the story sounded too sensational. So it turns out I was misinformed by a family member. In the interests of journalistic integrity, I have to issue a correction or I could not sleep at night.

    In fact, the couple DID have 30,000 stuffed away in RRSPs. Their downpayment was actually 140,000. All other details are the same. So, they put in 30,000 of their own money, 80,000 from a LOC and 25,000 from parents`HELOC.

    In some ways this makes the situation worse. They now have to pay back each year the taxes on the RRSP withdrawal, as they will not be repaying them in the next ten years. So on the amount they are supposed to pay back in, they will have to pay taxes instead.

    Moreover, they have their actual savings on the line in the event of even a minor correction.

    I guess this is technically not a sub-prime mortgage, then. More like a sub-optimal financial decision.

    • still, use 80k loc to skirt mortgage insurance. nice. wonder if the primary lender knew and bought their own. the diff is putting up $55k vs $28k. wonder dte on heloc ppty. sub-optimal is incredibly charitable.

      • For sure… I will pry for more details in time. This fascinates me as I am so close to this whole transaction and can watch it unfold.

        The HELOC property where the 25k was pulled out from has about 300k outstanding in mortgage, and is assessed around 900k – 1 million. It was a move-up from a previously paid off long term home.

      • Terrible decision they made. They should know that most lines of credit are demand loans which means they must be repaid to the bank “on demand”. Course, most people seem unaware of that little item. Until the bank asks for the money which is what happens as soon as credit tightens up and housing prices start to decline too much…….oh well……. buyer beware.

    • Thanks for the update/clarification, TPFKAA.

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