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Will Today’s Canada Mortgage be Underwater Tomorrow?

Prices are high in Canada, that’s not really any secret. The sky-high housing market began in Vancouver and now it’s made its way to Calgary and Edmonton. People anywhere East of there are now starting to worry that the rising house prices are going to make their way across the entire country. The problem is of course, that no one wants to pay three times more than what a home’s worth. But there’s a bigger problem at stake, and it’s left homeowners wondering what happens when prices stabilize and the value of their home actually drops. Will they be left with an underwater mortgage in Canada?

An underwater mortgage, as we discussed several weeks ago, is when a home has negative home equity; or, when a homeowner owes more on their Canada mortgage than the home is worth. And this can easily happen when a home is purchased at an over-valued price. When houses finally stabilize, the value of the home will drop – but the mortgage payment will remain the same. So you’ll be paying down a $350,000 mortgage for a home that’s only worth $200,000. This is when you are now in an underwater mortgage situation. And when prices are so high, it’s a valid concern for people who are searching the market today for a home.

So what can be done?

It all begins with the home-buying process. It’s common for people to want to run out and purchase more home than they can afford, thinking that things are all going to “work themselves out” further on down the line. But that train of thought is dangerous when prices are so high. Instead, home-buyers should be much more conservative during the buying process, Instead of pushing that Canada mortgage to its very limit, go a bit lower so that when prices drop, you can still make your mortgage payment or even pay more, gaining more in home equity and tipping the underwater scales in your favour.

To go along with that, put down the biggest down payment you possibly can. Your down payment is the very first home equity you will have and so, the more you make the more you’ll get. And the lesser chance your mortgage will eventually sink underwater.

If you can continue to make your Canada mortgage payments, having an underwater mortgage isn’t the disastrous situation that it seems to be. No one’s going to foreclose (as long as you keep making payments,) and little by little, you’ll gain more equity in your home and bring your mortgage back above water. And then one day, you’ll have enough equity to take out a home equity loan or HELOC to make renovations and add even more value (and equity!) into your home.

Today’s Canada mortgages could very well remain above water, even with prices so high. But it’s important that those who are in the market for a new home pay very close attention to the prices of those homes, as well as what they can actually afford. That bit of advice is important anytime you’re buying a home. But it’s especially important when prices are high, and you’re trying to save yourself from an underwater mortgage situation in the future. ”

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