Household Debt in Canada

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PMGT706-2016W-001 

Assignment 04

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Assignment 04

Answer 1

Household debt increasing to 127 percent of disposable income” mean that the amount of money that wage earners from a specific home owe to financial institutions is 127 percent of the amount of money those persons can spare from their salaries, which means that the householders wouldn’t have money enough to pay their debts. This is what happened in 2007 in the U.S. and that generated the 2007 crisis that brought problems to the whole world. This happened because some institutions were granting mortgages to people who wouldn’t be qualified for that mortgage.

To the homeowners this meant that they wouldn’t be able to pay their debts to banks in the 2007 case specially the mortgage, which would make their debt grow every time they don’t pay their installments.

When the household debt gets higher than 100 percent of disposable income it means that householders will have to make extra money to pay their debts. It is believed that every time the household debt level have risen significantly the possibility of a economical crisis grows, so economists recommend that governments and financial institutes work focusing or lowering this rate.

Answer 2

How Sub-prime mortgage different from a conventional mortgage:

Banks typically look at the income of the borrower and assess the borrower's ability to make mortgage payments. This is an example of conventional mortgage. To qualify for a conventional mortgage, the down payment must be at least 20% of the purchase price. Normally, borrowed money cannot be the down payment in a conventional mortgage. This may be cash or sale proceeds of other property owned by the buyer. The buyer has more immediate equity in the property as he contributes a larger down payment. Because of this higher down payment, conventional mortgage is less risky than sub-prime mortgage to the banks.