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Caily MacGregor Accredited Mortgage Professional

Caily MacGregor

Accredited Mortgage Professional


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99 Scurfield Blvd , Winnipeg, Manitoba

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Mortgage Strategy: Being Able To Afford Your Dream Home

4/24/2019

 

Most first time buyers have been previously renting or living at home, so buying their first home means having to become accustomed to paying their mortgage and all of the added expenses that come with homeownership (Visit my Blog: Calling All First Time Buyers- Don’t Become House Poor).With that said, your next home isn’t really front of mind until you decide it’s time to move. So how are first time buyers preparing themselves to be able to afford their next home? I have a strategy that I have share with my clients that, when used, can really make purchasing a dream home a reality.

Here’s the strategy:

DISCLAIMER:Please keep in mind I live in Winnipeg, Manitoba where we see a steady 1-2% increase in house prices year over year, we have in my opinion, one of the most consistent, affordable, steady markets across Canada. So the numbers I am using are based on this particular market. I am using an interest rate of 3.44% as it’s just a rate I used to derive a payment and is not best rate today (April 17, 2019). By the way my next blog post will be why it’s important we need to stop talking about rate (stay turned).

The example I’m using is a $250,000purchase with 5% downpayment, mortgage payments are based on 3.44% over a 25 year amortization is$624.95 accelerated bi-weekly payments(pays off your mortgage 2 years sooner). In my experience most first time buyers are ready to move up around the 5 year markso I am using that as the timeframe.

My strategy is simple, use the lenders pre-payment privileges to create more equity and pay less in interest costs. By increasing your payment you will also limit your payment shock when moving to your next home.

Here’s the breakdown:

A lot of lenders will allow you to increase your mortgage payment up to 20% for no fee. If your mortgage payment is $624 you can add $125 to each mortgage payment, which will make your new payment $749 bi-weekly. That and extra $3000 you are paying your mortgage down per year and $15,000 over the 5 year term. Not only did you just increase the equity in your home but over a 5 year term alone you are saving $3000 in interest costs ($26,389 over the 25 year period).

Mortgage Payoff Summary

Original loan amount

$251,900.00

Original mortgage amortization

25 Years

Interest rate

3.44%

Normal payment (PI)

$624.85 accelerated bi-weekly

Additional payment

$125.00 bi-weekly

Prepayment savings

$26,389.37 over 25 yrs

 

 

*Assuming the interest rate does not change during the amortization period.

Payment schedule

 

Regular Payment Schedule

Prepayment Payment Schedule

Yr

Total Payments

Interest Paid

Ending Principal Balance

Total Payments

Interest Paid

Ending Principal Balance

 

 

 

$251,900.00

 

 

$251,900.00

1

$16,246.10

$8,470.49

$244,124.39

$19,496.10

$8,416.60

$240,820.50

2

$16,246.10

$8,200.71

$236,079.00

$19,496.10

$8,032.16

$229,356.56

3

$16,246.10

$7,921.58

$227,754.48

$19,496.10

$7,634.40

$217,494.86

4

$16,246.10

$7,632.75

$219,141.13

$19,496.10

$7,222.87

$205,221.63

5

$16,246.10

$7,333.87

$210,228.90

$19,496.10

$6,797.04

$192,522.57

6

$16,246.10

$7,024.67

$201,007.47

$19,496.10

$6,356.46

$179,382.93

7

$16,246.10

$6,704.70

$191,466.07

$19,496.10

$5,900.54

$165,787.37

8

$16,246.10

$6,373.66

$181,593.63

$19,496.10

$5,428.82

$151,720.09

9

$16,246.10

$6,031.14

$171,378.67

$19,496.10

$4,940.75

$137,164.74

10

$16,246.10

$5,676.74

$160,809.31

$19,496.10

$4,435.74

$122,104.38

11

$16,246.10

$5,310.05

$149,873.26

$19,496.10

$3,913.25

$106,521.53

12

$16,246.10

$4,930.55

$138,557.71

$19,496.10

$3,372.54

$90,397.97

13

$16,246.10

$4,537.94

$126,849.55

$19,496.10

$2,813.16

$73,715.03

14

$16,246.10

$4,131.74

$114,735.19

$19,496.10

$2,234.30

$56,453.23

15

$16,246.10

$3,711.44

$102,200.53

$19,496.10

$1,635.41

$38,592.54

16

$16,246.10

$3,276.54

$89,230.97

$19,496.10

$1,015.70

$20,112.14

17

$16,246.10

$2,826.55

$75,811.42

$19,496.10

$374.51

$990.55

18

$16,246.10

$2,360.93

$61,926.25

$992.17

$1.62

$0.00

19

$16,246.10

$1,879.18

$47,559.33

$0.00

$0.00

$0.00

20

$16,246.10

$1,380.71

$32,693.94

$0.00

$0.00

$0.00

21

$16,246.10

$864.95

$17,312.79

$0.00

$0.00

$0.00

22

$16,246.10

$331.29

$1,397.98

$0.00

$0.00

$0.00

23

$1,401.04

$3.06

$0.00

$0.00

$0.00

$0.00

24

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

25

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

Now lets take into account that Manitoba has a steady 2% increase in house prices year over year for the past few DECADESso it’s reasonable to say that your $250,000 home would be closer to $275,000 in 5 years time.

So in 5 years time you could potentially have close to $83,000 in equity for the purchase of a new house.

So lets look at a new purchase and what this could mean so we can talk about the bonus of doing this strategy- Avoiding payment shock!


Net sale proceeds   (no mortgage penalty for this example)

$83,000 Sale Proceeds *sale price of $275,000

$1,000 Legals

$12,000 Estimated real estate fees

$500 Estimated discharge fee for you current mortgage

$69,500 Net Sale proceeds


New purchase

$425,000 Purchase Price

59,000 Downpayment from sale proceeds

$10,500 Closing costs (estimated) from sale proceeds

*No cash out of pocket for the new purchase

$864 New payment (non accelerated payment/ using same interest rate)

$749 Old payment accelerated with extra payments

$114 Difference in payment bi-weekly

If you did notincrease your mortgage $125 your payments would have been $624 bi-weekly and your downpayment would have been $41,000 compared to 59,000. The difference between your old payment and your your new payments would be $289 bi-weekly THAT'S A DIFFERENCE OF $22,750 over a 5 year term!

By add $125 to your bi-weekly payment you not only got yourself into a $425,000 home in 5 years but also your lifestyle will remaining the same as your payments will be relatively close to what you were used to paying over the past 5 years. 

After reading all of this you may be questioning just how you could free up $125 bi-weekly in order to increase your mortgage payments. Not to worry, my next blog will cover this!

 

 

 

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