“I just overheard a startling conversation while I was waiting for the bus at Broadway & Cambie. A couple was exalting over the fact that the interest on the “huge” amount of money they could borrow was only $1400 a month.”

“I just overheard a startling conversation while I was waiting for the bus at Broadway & Cambie (apropos “subprime”) – a 35ish couple just on their way home from an open house/discussion with mortgage broker. The female half of the couple was exalting over the fact that the interest on the “huge” amount of money they could borrow was only $1400 a month. She was quite excited over the fact that they would only have to pay the interest if they had money challenges at any time (aka – all the time). Neither of them seemed to think that interest rates would ever change from where they are now and that if they did experience “challenges” they could just pay the interest until they could sell for a profit. I am always amazed by how many of these delusional individuals there are, it really does not bode well for the future.”
Observer at VREAA 6 May 2012 5:03pm

24 responses to ““I just overheard a startling conversation while I was waiting for the bus at Broadway & Cambie. A couple was exalting over the fact that the interest on the “huge” amount of money they could borrow was only $1400 a month.”

  1. 35 is the new 25

  2. My math says $1400 is the interest on a $445K mortgage, 30Y @ 3.8%.

    A while ago I saw a building in Richmond with a condo to buy for $430K. The same floorplan a few floors lower rented for $1600/mo. Renting money, indeed.

    At 5.5% the interest jumps up by $600/mo to $2000 — about the size of their entire current payment at 3.8%.

    Hope they’ve got a generous emergency fund.

  3. I find it incredible that people don’t plan to ever really own their house anymore. Weird paradigm shift that seems to have happened over the past decade or so.

    It will swing back. But some people are going to be hurting when it does.

    • Yeah, interesting to recall that families would have ‘Mortgage Burning Parties’ to celebrate paying off the house.

      Here’s an intriguing image from such a party in 1974, for a church in Arkansas.

      Nowadays the only mortgage burning going on in the US is as acts of defiance.

    • gen y -> eyes bulging with student debt … no good jobs … sky high housing, even after 50% off … it’s a practical adaptation often that defines culture … things won’t begin swinging back until some combo of the 3 above change enough … appears to be gaining momentum pretty fast in the southern territories … rabidoux points out the demo shift will have big consequences for boomer wave cashing out to fund their retirements, especially after they get beat on in the equity and bond markets – the fundamentals on the demand side looks pretty weak … i was feeling better earlier 😦

    • That is the concern. We are coming to the end of a consumption based paradigm started in the seventies using inflation as a tactic. We can fall back on other resource and service sectors, but a lot of air will have to leave the system.

      Credit has been around for eons, but it used to be a wink and a nod. Debt slavery has entered like a quiet parasite. People should sue the city tax assessor’s office for jacking appraisals instead of just raising taxes and calling it what it is.

  4. “At 5.5% the interest jumps up by $600/mo to $2000 — about the size of their entire current payment at 3.8%”

    why do renters assume a variable mortgage? The overwhelming majority of first time buyers lock in a 5yr fixed rate

    • fixed is when lock is good for entire amort period

    • Irrelevant. If interest rates go up to 5.5% tomorrow, some owners will pay more immediately and some will pay more later — maybe even in five years. The question is not how long you get the current rate for, it’s what happens to the market when rates go up.

      Know anyone locking in for 25 or 30 years in Canada? Think that’s a good choice? They don’t have to worry about their payments increasing, but it’s a hell of a long bet.

      • 10 year fixed at 4% is what is available now. Most owners will ditch their variable well before it reaches 5.5%

      • You’re focusing on monthly costs as if they’re the only thing that will change with increasing rates, and as if they’re the only measure of whether purchasing a home is a good financial decision.

        Locking in at 4% for 10 years doesn’t do anything to protect the value of the property. An increase of rates to 5.5% knocks out 25% of the future buyer’s maximum budget.

        That’s just one way that the dominoes can start falling. The point is, it’s overwhelmingly likely that the referenced couple and others like them will find themselves a lot poorer a few years from now than they would have if they’d rented, or if they’d bought what they can afford. (Quite possibly nothing at all in Vancouver.)

        Fixed vs variable rates have nothing to do with it, and is a straw man argument at best.

        If they’re buying a home, not an investment, then their net worth in a few years doesn’t matter as much, and if they’re planning to live in their house until they die even an enormous paper loss might not be a big deal.

        But either way, they sound like they’re stretching it now and they’ll have higher rates to contend with in the future. Like I said, I hope they have a generous emergency fund to absorb that blow. (Alternately, a 30% salary increase might cover it.)

      • “Locking in at 4% for 10 years doesn’t do anything to protect the value of the property.”

        it will keep owners in their home and hedge against rising mortgage costs during the short term blips in the market. 10 years worth of stability is probably worth at least two corrections in this market.
        Anyone on variable or renewing a mortgage should consider the 4% 10 year fixed by the end of this year.

      • Sorry in advance for breaking the quote up so granularly.

        > it will keep owners in their home

        Perhaps. Indeed there are numerous people in the US that are still in their homes, but that doesn’t mean their original choice was the best course of action available given the information at the time.

        > and hedge against rising mortgage costs

        Another strategy is to buy later at a lower price.

        > during the short term blips in the market

        People in various other countries wouldn’t define their current situation as a “blip.” It’s one thing to bet that Canada will avoid a US-style correction, but to deny the possibility would be foolish.

        > Anyone on variable or renewing a mortgage should consider the 4% 10 year fixed by the end of this year.

        I agree somewhat. Certainly true for people whose properties are first and foremost their homes, who have substantial equity, and who aren’t relying on their equity as a future source of capital.

    • Only in the past year has fixed become more popular than floating for first time buyers given that it’s pretty easy to get fixed at 3% or less. Two years ago, most first time buyers went for floating.

      Regardless, mortgages are very cheap and the recent wave of re-financing is managing to buy more time for a lot of folks that are just hanging on.

      It also appears that bond rates could be pressured yet lower again this year and Canadian households continue to gorge on more debt. It no longer makes any sense to use your own money to buy real estate as other investment classes pay considerably higher returns than mortgage rates. Interesting times if you can take advantage of it.

  5. Lock in for 10 years?
    Penalty for breaking the Mortgage is not funny.
    In US, they don’t have to worry about IRD, so it is common for them to lock in for 25 years and sleep sound.

    “Bank Robbery” in reversed.

    • depends on the mortgage details Chris. If the 4% 10 yr fixed is transferrrable it could be worth it’s print in gold for the home seller if rates are far higher. No way I sign off on 10 year fixed unless it had some ability to transfer.

    • Unless I misunderstand IRD, it’s is only a factor when breaking a mortgage when current rates are lower than the locked-in rate. (Not the only source of penalty, mind you.)

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