Tuesday, November 14, 2006

Conservative investors take more risk?

Conventional wisdom has it that conservative investors are more likely to save up a solid downpayment in the neighbourhood of 25% of the value of the home before jumping into the real estate market, while riskier people are the ones who sign up for no-money-down, 35-year mortgages and the like.

But an interesting post out there in the pfblogosphere is aiming to try to turn that notion on its head.

This post makes the contention that truly conservative investors are in fact more likely to go for 0% downpayment options, where the purchase price of the home is 100% paid for by the bank.

Basically, the argument is that in 100% financing deals, the bank is the one swallowing 100% of the risk -- both that the buyer won't be able to pay off the mortgage, and that the value of the asset will depreciate.

The reality is the conservative financing option is 100% financing. You have pushed all risk to a third party -- the bank! In doing so, you remain completely liquid -- the true goal of a conservative investor.

I'm not sure I buy the argument myself (the author's job as a mortgage broker clearly gives him an agenda that colours his opinion, IMHO) but it's certainly an interesting viewpoint.

My own nature tells me the best plan is to save up a significant amount of the purchase price for a downpayment, as a hedge against some calamity happening later on -- like losing a job, having to move, or a real estate crash.

So that's what I'm doing. Apparently that makes me a risky investor. :)

1 comment:

Anonymous said...

I'm inclined to agree with the author of the post you linked, but for a different reason... depending on the real estate market you are in, the value of property may be increasing at a faster rate than you can accumulate an appropriate down payment. Sooooo, if you really wish to be a homeowner, it may be wise to jump in and make a purchase, and watch your property value rise, while your mortgage gets smaller. By making extra payments wearly in your mortgage, you can significantly reduce your amortization, giving you the breathing space of a larger down payment.