I've been reading Condo Bible and it has the following passage:

A solid down payment of at least 25 percent will act as a buffer for you at mortgage-renewal time should interest rates slowdown. If the market drops in value when it's time for you to renew your mortgage, your only bailout, unless you have cash reserves, will be to apply for a high ratio mortgage by utilizing whatever equity you might have in your property - from the initial down payment you put into it.

In general, a solid down payment will enable you in times of trouble, to more safely arrange a new high-ratio mortgage, private financing against your equity, or a line of credit from your bank.

In contrast, if you buy a unit with a small down payment (5 to 10 percent), you may find yourself in a very real predicament down the road for the simple reason that there may not be any equity in your condo unit if the market tanks.

What would happen if I were to buy a condo with 5% down payment and the real estate market tanks 30% and I'm left with no equity? Would the bank not renew my mortgage when it's time for a renewal? What are the consequences? The book, or at least the chapter that contain this passage, does not address this question.

  • Will a bank in Canada even offer a 5% down mortgage? If so, did you ask them what they'll do at renewal time given such a drop? – JTP - Apologise to Monica Mar 8 '14 at 20:49
  • I actually don't own a condo at the moment. My question is hypothetical. – burnt1ce Mar 8 '14 at 21:16
  • @JoeTaxpayer Yes, 5% downpayment mortgages are available in Canada, to first-time homebuyers. Mortgage loan insurance would also be required for a downpayment less than 20%. – Chris W. Rea Mar 8 '14 at 21:31

It doesn't matter. You will just renew your mortgage at the prevailing rates. That's part of the mortgage contract.

The problem that happens is if you want to move your mortgage to another bank for a better rate, they may not accept you. Your re-negotiating position is limited.

Most mortgages have a portability option where you can even transfer the mortgage to another property, but you'd have to buy a cheaper house.

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  • So is the author is misleading/wrong? Is there any "very real predicament down" if I were to lose all of my equity from a real estate crash? – burnt1ce Mar 10 '14 at 13:50
  • Not for those who haven't, or don't want to change the mortgage. HELOCs (technically a demand loan unlike mortgages) and such can complicate the process. – brian Mar 10 '14 at 14:53

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