Let’s say you buy a house worth 1 million, with a mortgage of 800k. Now the market collapses by 50%, so the house is only worth 500k. To get back to the 80% mortgage, you need to pay back 400k to the bank.
Not true; the house would belong to the bank (margin Call) and you still owe the bank 300k (or whatever the difference when they liquidate it).
Why do they need to liquidate it? Let’s assume, I want to keep the house and pay the bank 400k to get the mortgage back to 80%, would this not work?
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Yes, that is the additional funds @Giff was refering to.
In this case you have:
- a house worth 500k
- outstanding debt 400k
- downpayment 600k (200k at the beginning, 400k additional capital)
Ok I got it, that’s why I would not consider getting a mortgage on 80%, maybe 60-50%, to reduce this risk. And anyway our income would not grant us a mortgage with much less down payment. Unless my wife just get a job at 100% for a few months just to get the mortgage and then she quit but I don’t think it’s a good idea.
On the other side I would not buy such expensive house, even if I can afford, if I don’t think it’s a in a high demand area. So I’m maybe good renting another 5 to 10 years until either I have enough founds to invest in a house with 50-60% down-payment (or more) or that the housing market crash deep enough to make it worth taking the risk. At least I’m no more having remorse spending money on rent now that I know it doesn’t change much in the end regarding the situation.
I don’t know where you live, but I live in a rural area and something halfway decent for a family here starts at 850k, below you only get crap houses or crap location.
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Totally agree with your conservative approach. Many don’t fully realise the risk they are taking.
To add my two cents on risk, we had several arguments with my S.O. on the rent vs. buy topic, my main point pro-rent (being a very risk adverse person) is the lack of leverage, freedom of change anytime and lack of opportunity cost. Also the market is a complete bubble where we live.
Don’t take me wrong, I’d love to have a property where to live, but as much as that is desirable, the feeling of being very limited in your options of movement and financial freedom for 5-10y at least seems a bit risky to me.
She, on the other hand, due to family background craves for ownership and “building equity” in something concrete (and emotionally meaningful, after all).
We settled on a compromise, which is looking for an apartment vs. a full house, and a property that could be financed by either one of us in case life takes a turn for the worst. Most likely I will need to support with a bit of equity for downpayment, this can be done prior to discussion with the banks, but otherwise she can get a mortgage entirely on her own relatively comfortably, and I would pay rent afterwards.
Option to consider.
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