It was brought to my attention that Royal Bank has recently started a number of blogs which feature a bunch of hip young adults trying to juggle life and money. There was a blog post entitled "
Just Give Me Four Walls", which talks about how students can get a mortgage to own a place to live.
The Mortgage Question
I had the opportunity to speak with Bernice Dunsby. She’s RBC’s Senior Manager of Client Acquisition, Home Equity. Basically, she knows Mortgages. She assures me that purchasing a home (or apartment or condo or loft, etc.) is still a stable investment in today’s market.
“Over the past ten years, there’s been a 65% increase in the value of homes,” she says. “If you think about increase value, does it mean a good investment? Yes.” [...]
I wanted to know whether it was even a possibility to for a University student to think about signing him or herself up for a mortgage.
It’s Possible. Even individuals with little income can qualify for mortgages nowadays. “In the past, banks required a minimum of 20% on the down payment of a mortgage,” Bernice tells me, “but today you can own a home with no money down. You can literally purchase with no down payment.”
While this may seem like a gift, Bernice heeds warning that 'no money down' means you are financing more over the term of the mortgage, which means it's going to cost you more in the long run. But, that may be ok depending on the way you look at it: when you start paying off your mortgage, you build equity. Equity is the value of your home in the market, less what you owe in mortgage payments. So, every time you make a payment, your house increases in value because there's less money owing on it.
This article really rubbed me the wrong way because getting a mortgage with no money down is exactly the reason that fueled the Subprime Crisis in America, and pushed them to the brink of recession. Basically you're lending money to people who you really can't afford to buy a place! They obviously can't afford it because they can't even pay the downpayment on a house.
In addition, the whole notion of students getting mortgages for houses is quite illogical to me. I have a pretty good job right now, and even now I can't borrow enough to buy a condo. Why on earth would students have more borrowing power than I do?
Someone responded to the blog entry with this:
Great post Zach! I've been wondering about this too. And thanks for addressing the mortgage crisis in the states. I've been thinking about the spillover effects and wondering if buying was still going to be a good investment. I suppose it always is! 65% over ten years definitely beats inflation!
That was the last straw. I had to chime in. The epic battle between Housing Bulls and Bears were about to begin. This is what I had to say about it.
CHaN:
That's actually not a very good investment. A 65% return over 10 years means your money is only growing at 5.13% a year.
If you had invested in say the RBC Canadian Index Fund (a mutual fund), You would have a 296% return over 10 years, or 11.1% a year.
Check the math and the facts yourself: http://www.rbcam.com/pdf/information/rmfcdi.pdf
65% or 296%.... hmmmm, I'll take the mutual fund please.
So they're actually talking about paying for a house/condo/flat while still IN school? So as a student you have to pay mortgage, plus fees, plus living. K, now I know whether renting or owning, there's still money going out for living, but last I applied mortgage payments > rent, exceptions to the rule: if you can find a lot of people to live with you.
I wonder if that 65% is the guestimate with or without a down payment (I've only read half of it so far). The lower the down payment the higher the monthly payments, thus the less goes towards the principal. Plus variable vs. fixed would be a huge factor. Would suck to be a student and go bankrupt.
Heh, I also like Richard's comment "Never in my life have I read such horrendously bad advice and market-pumping drivel ...."