The Housing Bubble
I worked in banking I saw first hand the devastation of a local housing bubble we had here in BC in the late 70s, early 80s.
I remember the loans offer joking at the time that you needed a husband, wife and mistress to qualify for a mortgage. That was at the height of our bubble, when housing prices had gone up more in BC than any where else in Canada, just in time for that enormous interest rate spike. I worked in bank and saw people lose their homes.
It was while working in banking that I first started studying the enormous power of compound interest and all the effects of changing rates on mortgage payments.
I'm not sure how it came about, but in Canada low downpayment mortgages had to be insured after that, so a 5% down mortgage also costs 2.5% mortgage insurance. This isn't to protect the consumer, but more the banks.
Legislation that would protect the consumer would be lending laws that limit the amount a consumer can borrow based on a fixed evaluation of income, down payment, amortization period and interest rates.
I have a 4.4% interest rate mortgage.
Qualifying for a mortgage should not be based on current interest rates. The leverage of the potential increase in payments is utterly enormous when interest rates are down, and the amount of money people quality for at low interest rates is insane. I qualified for 127% more mortgage that I borrowed for interest rates at 4.4%. If they'd been 3%, well, then I'd have qualified for 233% more than I borrowed.
Qualifying for a mortgage should be based on being able to afford the payments with 30% of your income with 25% down and 8% interest for a 25 year mortgage. I'd have actually only qualified for 15% more than what I borrowed with that criteria.
So, then comes the fudging factor. Zero down loans are fine, if you afford them with 30% of income at 10% interest. I'd actually have maxed out my borrowing power without a downpayment using this criteria.
And there's nothing wrong with having it go the other way, say 30% of income at 6% if you have 50% down. Under this criteria I would have qualified for about 65% more mortgage that I took based on the interest rate, but I would not have qualified for this measure because I did not have half down.
The actual term of the mortgage should be based on the criteria given. You have a 25 year mortgage at 8%, but with current interest rates you will pay it off in x-years.
Anyway, I've gone on for years that allowing these mortages shouldn't be allowed, and indeed, even with our stronger laws, I think a lot of people are probably still going to find they are in big trouble even in Canada. I can't imagine having had a mortgage more than double what mine started at and facing an interest rate increase.
Check out the following blog for an excellent read, http://thehousingbubbleblog.com/