Let’s use numbers that are easy to work with so that we can understand the concepts rather than having to struggle with the math:

Joe & Mary purchased a $100,000 home in Mississauga, in 2006 with a 5% down payment. They worked with a mortgage broker to get them an excellent 5 year mortgage rate of 5.09%. The math would be as follows:
Purchase Price: $100,000
Minus Down Payment: $5,000
Balance: $95,000
Plus Mortgage Insurance: $2,612.50
Final Mortgage Amount: $97,612.50

Let’s assume the following about the housing market over the five years of their mortgage term:
2006 & 2007 – Market appreciated by 5%
2008 & 2009 – Market depreciates by 10% per year
2010 – Market appreciates by 1%
Thus, after 5 years and at the time of their mortgage renewal, their Mississauga home would have an approximate value of $90,195. Equally, Joe & Mary would have an approximate mortgage balance of $86,498 (assuming they paid monthly and nothing extra). This means that their new mortgage would have a Loan to Value (LTV) of 95.9%

FYI: LTV = Mortgage Amount/Property Value ($86,498/$90,195 = 95.9%)

This presents at least two potential problems for Joe & Mary:
1) In Canada we don’t have insured mortgages with less than 5% equity (They only have 4.1% equity).
2) They would have to re-qualify for both the lender and the mortgage insurer’s requirements.

In the next blog we will look at their qualification criteria and how this could cause them to lose their home and what they can do to prevent this.

Stay tuned….and let me have your questions and comments.