Here are some scenarios for us to consider if one was to purchase a home today with no money down and a 40 year mortgage (a fairly common occurence by all accounts).
Scenario 1: Home Price Appreciates 5% per year for the next five years.
Homebuyer couple buys $350,000 Townhouse in Surrey with 0% down and a 40 year mortgage at a 6% interest rate. They pay the closing costs ($2,500) and CMHC insurance of $12,950. Fortunately for them the home is worth $450,000 in five years when their mortgage comes up for renewal even though they still owe $337,000. edit
Scenario 2: Home Price is flat for 5 years
Homebuyer couple buys $350,000 Townhouse in Surrey with 0% down and a 40 year mortgage at a 6% interest rate. They pay the closing costs ($2500) and CMHC insurance of $12,950 out of pocket. After five years they have only paid down $13,000 of principal and they still owe $337,000. - edit - Not a good situation.
Scenario 3: Home prices decline 30% over 5 years
Same homebuyer couple but after five years their lovely townhouse is only worth $245,000 and they still owe $337,000. What are their options?
They don’t have too many options that make sense as far as I can see besides declaring bankruptcy. I am sure the bank would continue to accept their payments and renew the mortgage but the couple may not be so willing to continue paying for a property that they are so far in the red on. They could walk away and accept 7 years of not having access to credit cards, loans, mortgages but they could pay less money per month and stop the bleeding.
What would be best?
The best thing for them to do in scenarios 2 or 3 is to just rent. In scenario 2 or 3 they could have been paying rent and saving the difference between the rent and the mortgage payment and they would have been much further ahead. In scenario 3 they have essentially ruined themselves financially for a long period of time. Unfortunately I think many of our neighbours in the future will consist of scenario 3 people.