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Just becuase you can get a big mortgage doesn't mean you should

posted by The Mortgage Associates    |   September 15, 2014 08:41

Just because you can get a big mortgage doesn't mean you should

Article by Douglas Hoyes, HUFF Post, September 14, 2014

"The average house price is expected to reach $396,000 in 2014 and $402,000 in 2015 according to the Canada Mortgage and Housing Corporation. And that doesn't even come close to reflecting higher prices in cities like Toronto and Vancouver. Since higher house prices mean larger mortgages, how can we determine just how much mortgage is too much of a risk?

The "cash flow" answer is that if you can't afford the monthly mortgage payment (and property taxes, and repairs and maintenance) your mortgage is too big. The "equity" answer is that if you have less than 10 per cent equity in your house, you are at higher risk of financial problems.

We recently dug deeper into our analysis of everyone who filed a bankruptcy or consumer proposal with my firm, Hoyes Michalos & Associates, and we discovered that insolvent debtors who own a home almost always have a high ratio mortgage:

More than nine in 10 insolvent homeowners had mortgage debt exceeding 80 per cent of the value of their home, the traditional definition of a high risk mortgage. Worse, seven in 10 had less than 10 per cent equity and 64 per cent reported having no net realizable value in their home at all."

To read the full article, please click here.