More gloom on the mortgage front - Down Payments & Insurance costs rising.
Falling property prices should be good news for prospective buyers, but it’s just not happening that way. All over the US & UK, long-time renters and prospective investors are finding that down payment requirements and up-front mortgage fees are pricing many of them right out of the market.
It’s all about risk management, according to the experts. companies who have been burned in the recent credit crisis are protecting themselves against unwanted risk by getting as much money up front as possible. That means down payments averaging twenty percent, and ranging as high as thirty-five percent for investment properties.
100% mortgages have all but disappeared. Mortgage brokers and property owners are lucky to find companies who’ll accept a five percent down payment - and then only with top line credit. Most mortgage companies won’t consider a mortgage unless the buyer is prepared to put down at least ten percent.
JP Morgan Chase, one of the USA's largest mortgage companies, is typical. In most markets, the bank requires at least 10% down before it will approve a mortgage. In areas that have been hit hard by foreclosures, the minimum jumps to 20%, and in places like Reno, Nevada, where the housing crisis has devastated the local economy, Chase requires at least 25% down payment on any mortgage loan.
Insurers driving up % Down Payments
One of the things driving the higher deposits, according to an economist for the Mortgage Brokers Association, is the fact that private mortgage insurers have increased their down payment requirements. Private mortgage insurers (PMI) typically guarantee repayment of a mortgage if the buyer defaults. With the foreclosure rate rising thanks to the subprime mortgage market collapse, PMI companies are refusing to insure mortgages unless owners put down at least five to ten percent in declining markets.
At the same time, they’ve raised their rates. Historically, private mortgage insurance cost about 0.5% of the purchase price of the property. These days, a borrower who puts down 5% against their mortgage may pay as much as .75% for PMI in the first year.
Additionally, concerns about Freddie Mac and Fannie Mae have pushed interest rates higher than they should be, say most financial experts. Freddie and Fannie buy about half of all outstanding property loans in the US. As concerns about the solvency of the two programs grow, investors who fund them are demanding a higher rate of interest to balance the higher perceived risk for their investment. That, in turn, drives up the interest rates on market mortgages.
High Mortgage Costs Slow Market Recovery
The upshot of all these combined factors is that the cost of buying a property has risen even as property prices are falling, and the up front costs have risen most of all. Typically, lower property prices would attract new owners into the market, increasing demand for property and nudging prices up again.
Unfortunately, the natural effect of lower property prices is being squashed by the rising costs of buying a property. With fewer owners able to qualify for a mortgage, the housing market will continue to stagnate, especially in areas that were overbuilt during the boom years.
The Good News for Savers
There is good news for those who have been carefully stacking away money toward a deposit on a home, though. A year ago, if you’d saved $10,000 toward a down payment, you were looking at cottages - if you could find anything at all in your price range. In many markets today, that same $10,000 is a generous down payment on a 2-3 bedroom property in a comfortable, attractive area.
For everyone else, though, the current reality will stick around for months before we start to see a correction.
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