When you go to buy a car in Toronto without having the loan on your current
vehicle repaid in full, the lending institution will add the amount owing to the
purchase price of the new car. This means that you actually owe more than the
value of the car on the loan so that you are essentially paying off two vehicles
rather than just one. This is what is called negative equity – you owe more than
you would get if you were to see this new car as soon as you buy it and you
would still owe money.
Many Toronto real estate buyers are
now finding themselves in a similar situation but not because of the same
circumstances. They did not buy new Toronto real estate and have the outstanding
balance added to the new mortgage. It has occurred because the value of their
real estate has fallen so that they now owe more for their real estate than they
would get for it if they were to sell it at current Toronto real estate prices.
The crash in the real estate market has created a drastic decline in the values
of homes so that prices are way below what they were a few years ago.
This situation has also dramatically impacted the housing market in California
and Florida. The majority of real estate owners in these states are finding
themselves basically upside down on their mortgages and are in a negative
situation. Most of them purchased real estate when prices were at their highest
and interest rates on the mortgage loans were also high. In 2005-2006 real
estate prices doubled and even tripled in some areas of these states, just as
they did all across the country. As interest rates on adjustable rate mortgages
started to rise when they were adjusted many homeowners were faced with
impossible odds when they received their renewed statements and were unable to
come up with the unusually high payment amounts.
There are homeowners in Toronto who are not encountering difficulty in making
their payments on their mortgages even though the value of their real estate has
decreased. Many of those locked into fixed rate mortgages that they could manage
in their household budget and are still able to make their payments. These
homeowners who are employed in areas of the economy not hit by the recession can
feel safe in feeling that they can ride out this economic storm and enjoy higher
equity in their Toronto real estate when the market starts to rebound. They are
in a great place to make a profit on their real estate at this point in the
future.
Others are not in this same secure situation, though. For those who have lost
their source of income due to layoffs and job cuts, they have no choice but to
try to sell their real estate and relocate to other areas where they can get
employment. They are finding it increasingly difficult to sell their homes at
current market prices because they will not even realize enough money from the
sale to pay off their mortgage.
For homeowners faced with rising mortgage payments due to the increase in the
APR, they are often left with no choice but to declare bankruptcy and allow the
lender to proceed with a foreclosure of their real estate. Many of them have
very little equity built up in their Toronto real estate due to the fact that
relaxed lending practices allowed them to make little or no down payment on the
purchase. Thus they have very little of the mortgage balance repaid and so are
in a negative equity situation.
The decline in Toronto real estate prices also affects homeowner’s ability to
take out home equity loans to help tide them through these difficult economic
times. Because the real estate prices are lower, the amount of equity is also
decreased which doesn’t give them a lot of leverage when looking for a loan.
Lenders are also wary of the risks involved because it is possible that
homeowners who are having difficulty keeping up with their payments may default
on the mortgage and the home equity loan and so leave them at risk of losing
even more money. The default rate has also risen on the number of people not
repaying home equity loans, just as it has on the defaults on mortgages.
Lenders are also restricting the number of mortgages they approve and now
require higher down payments. The typical amount is 20% of the purchase price of
the home, which has closed the door on buying for many who would like to take
advantage of lower prices.