Mike

“The other near certainty is that house prices will go back to a normal multiple of family income. In the end, we, the people, have to be able to afford the houses and they are affordable at something around 2.8 times family income. When they peak in Boston at 6 times and nationally at 3.9 times, you know you are in for tough times.”

I thought it might be relevant to look at that quote a little more. It’s interesting that according to the average sales price on the CREA website the average home selling price in Canada is $317800. According to the median income on the May 29th 2007 issue of the daily by stats Canada we make around 60,600 (64300 if you add 3% for 2 years to get 2007). That puts our ‘cost ratio’ at 4.9 . . . (317800 / 64300 = 4.9). Then you look at our peak, which is in Vancouver as far as the data I have goes at 9.2 times income. It looks to me like our price run up is far worse than in the USA. Possibly we are looking at some even tougher times than in the USA right now.

I don’t have any stats that would support my theory that any amount of 40 year AM’s are taken by people why are either investing or simply taking the 40 year to keep minimum payments lower. I’ll have to take your word for it, I would think there would be something like 5-10% of the people in each case so around 10-20% of the total. Like I said above, with lump payments and payment flexibility I don’t see any great reason to not choose the 40 year AM if it’s available; other than the insurance cost I mean. Even that is fairly negligible in the grand scheme, if it’s only 0.2% per 5 years and you are putting 5% down you end up with instead, of 2.9% for insurance at, 3.5%. So on a 100000 house you would put 5000 down and instead of your mortgage being 95000, it would either be 97755, or 98325. This would translate to 619.64 at 5.9% over 25 years or 529.31 at 5.9% over 40.

Granted, it doesn’t save much, but during a job loss the 90 bucks a month might end up meaning you keeping your house, or losing it. Plus, over 25 or 40 years there is probably going to be some point where your income is less and some where it’s more. Even if you make lump sume payments strictly to have some breathing room later if you need to reduce your monthly payment in the slow times it’s still not that bad.

I guess it all comes back to ability to afford; if you are making 40K you can’t afford a 400K house, no matter what your banker, broker, or agent say.

The thing is, instead of taking a 40 yr AM, a lot of people never even consider renting until their salaries reach a level that’s affordable. This used to be a perfectly normal alternative when you couldn’t afford to buy but now seems to not be an option. I think the pressure to own has made this the case (and we fell for it as well).

I have to think that the number of people that choose a 40 yr AM so they can save and invest more money would be fairly insignificant. Considering you have to pay an extra 0.5% (or 0.2%) for every 5 years AM beyond the standard 25 makes it pretty tough to beat considering rates are around 5-6% currently (after tax of course) before even adding in the extra fees of mortgage insurance. Our interest rate is 4.39% and still we choose to make extra mortgage payments rather than invest the savings.

But Traciatim, I think you’re likley in the minority. Most people that I know that went long AM did so to get a nicer / bigger house. The brokers are “reminding” younger couples that their salaries will increase so they should be able to afford to renew in 5 years with a 20 yr AM.

I find it a bit strange that these brokers have no problem selling people homes based on “expected” salary but neglect to mention that inflation will eat up a portion (or all!) of that raise and so might interest rates. And they neglect to mention that maybe adding kids to the mix, a stay-at-home parent, child care, etc. could really swing things into unaffordable territory.

If they’re going to take potential future earnings into consideration, they should add potential future expenses and inflation into the equation as well.