Rent vs. Buy - How Low Rates Impact The Math
If you have considered purchasing in the past but the rent vs. buy analysis did not justify purchasing, I encourage you to revisit the math. Lots has happened in the last year, including a big drop in mortgage rates. One year ago interest rates being offered for a mortgage with less than 20% down were around 3.69%. Today that has dropped to 1.69%. So what does that mean for thosecomparing renting vs. buying? These low rates have made home ownership far more attractive in two ways:
Lower Payment = Lower Carrying Costs Of Home Ownership
When interest rates drop, mortgage payments decrease. This can have a big impact on your overall carrying costs as a homeowner.
Example:$300,000 mortgage amortized over 25 years in a 5-year term
At 3.69% = $1,528/month
At 1.69% = $1,226/month
= $302/month drop in mortgage payments
The interest rate drop equates to $300 less in monthly carrying costs.
Less Interest = More Equity Faster
When interest rates drop, more of your mortgage paymentgoes to paying off your principalversus paying off your interest costs. You pay off more of your mortgage and build equity faster.
Example:$300,000 mortgage amortized over 25 years in a 5-year term
At 3.69% = $51,417 interest paid; $40,266 in principal paid = $259,734 loan balance after 5 years
At 1.69% = $23,206 interest paid; $50,349 in principal paid = $249,651 loan balance after 5 years
= $10,083 more equity after 5 years
The interest rate dropmeans you will pay off over $10,000 more of your mortgage loan in the first 5 years.
If you want to look at how you can take advantage of this mortgage market to become a homeowner, give me a call!
Mortgage Rates Below 2% - Don't Miss The Opportunity!
Some days I feel like I work in an alternate universe. I never thought we would see a time where nearly all standard mortgage rates are below 2%. It has created some amazing opportunities you should consider:
Renters Save More By Buying- The lower the interest rate, the lower the monthly payment. Andmore of that payment is going toward paying down your principal versus paying interest. So as mortgage rates have dropped to historic lows, the cost of owning a home has dropped. The case for ownership over renting gets stronger as rates drop.
Move-Up Buyers-We are all using our homes so differently today. It is not just our home but our office, our gym, and even our school. If you are feeling the crunch on space, it is a great time to look at moving up without a big jump in your mortgage payment.
Refinance -Whether it is to drop your monthly costs, to decrease interest costs, or to pay off other debts, it is a great time to revisit your mortgage and see if a new, lower rate can improve your financial picture.
Investment Property- Have you always wanted an investment property? Whether it is doing a basement suite or buying your first investment property, these low rates offer a great opportunity to become a landlord with far lower carrying costs. It is much easier to positive cashflow on a property with rates this low!
Low Rates: Are They Here To Stay?
While the Bank of Canada has expressed their intention to keeptheir benchmark rate low for the long term, that does not mean fixed mortgage rates will stay at todays lows over that same period. Fixed mortgage ratesare tied to the bond market, strength of the economy, and lending risk. If we see a vaccine roll out in 2021 and our economy bounce back quicker than expected, we could see mortgage rates move up.
Canadian Mortgage Trends - Optimism Returns to the Markets. Could Fixed Rates Start to Rise?
If you want to look at how you can take advantage of this mortgage market, give me a call!
Dropping Mortgage Rates - Great For Buyers, But Sellers Beware
We are currently seeing historically low interest rates on mortgages. This is a fantastic benefit for buyers, making their mortgage payments lower and home ownership more affordable. But when rates drop quickly it can mean significant penalties to break a fixed rate mortgage. This can have a big impact on anyone breaking their mortgage before their term ends. And while porting to a new property can allow you to get credited back for the penalty, sellers do not always have that option or they can actually save more breaking the current mortgage for a new, lower rate.
If you are selling and not buying again, refinancing, choosing not to port, or you cant meet your lenders porting requirements, the penalty will be your cost to bear. Ill explain why penalties are higher when rates drop and why a seller may need to call their lender more than once to confirm their penalty.
Dropping Rates = Higher Fixed Mortgage Penalty Calculations
When a borrower breaks a fixed rate mortgage before their term is complete, they will pay a penalty. That penalty is generally the greater of a 3-months interest charge, or an Interest Rate Differential charge (IRD). The concept behind an IRD is to charge the borrower for what the lender loses in letting them out of the mortgage early. When rates drop significantly over a short period of time, the lender loses more by letting a borrower out of their mortgage because they will fetch lower returns when they re-lend out that money again.
Example: $350,000 mortgage with a 5-year fixed term at 3.5% breaking it after 2 years
The lender looks at the rate they are charging for a 3-year fixed mortgage (because that is how much time is left in the borrowers term). Lets say their current 3-year fixed is 2.2%. The interest rate differential is 1.3% (3.5% -2.2%).
IRD penalty = $350,000 current mortgage x 1.3% x 3 years = $13,650
3 months interest = $3,063
Penalty to break this mortgage is $13,650.
This is a simplified example and lenders do vary on how they do this calculation. Some lenders go even further and calculate in the discountoff their posted rate you initially received, making penalties even higher.
Variable rate mortgages have a different penalty calculation. The standard penalty charged is 3 months interest, making them far less expensive to break early.
Selling? Check Your Mortgage Penalty Again
The penalty on your mortgage is always moving around based on what rates are doing and when in your term you are breaking it. So, if you called in the spring to find out what your penalty to break your mortgage would be, that penalty could be much lower now if that lenders shorter-term rates have dropped. If you are considering a sale or refinance be sure to confirm your mortgage penalty first.
Align Sale To Your Renewal Date
If you do have a high penalty charge and have an upcoming renewal, you can save thousands by selling with a possession date that falls on or after your mortgage maturity date.
If you are looking at selling, make sure you understand your options. Contact me to calculate what youll come away with on a sale and to understand the mortgage considerations.