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Christopher Featherstone
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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- Dont Become House Poor).With that said, your next home isnt really front of mind until you decide its 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.
Heres 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 its 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 its important we need to stop talking about rate (stay turned).
The example Im 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.
Heres 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 its 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 THATS A DIFFERENCE OF $22,750 over a 5 year term!
By add$125 to your bi-weeklypayment 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!
Similar Housing Demand Conditions in Canada and US
Housing markets in Canada and the US are sizzling. Recent headlines have used superlatives to describe housing market conditions in both countries and the data do back this up. Still, a closer look reveals some interesting distinctions as well. Home price and sales metrics show that while the US market is hot, Canadas is hotter. For example, existing home sales, which make up the majority of overall sales in both countries, is well above historical averages, but Canadian home sales have outperformed. As of March 2021, home sales in Canada were 75% higher than the average over 2018 and 2019, while it was 13% above in the US. Likewise, home prices also spiked. In Canada, the average home sold was 32% more expensive than what it was a year ago, and it was 17% higher stateside.
From a high level, the list of commonalties across markets during the pandemic is longer than the areas of difference, particularly on the demand side. Perhaps the most influential demand-side driver has been historically low mortgage rates. Responding to the impacts of the pandemic, the Bank of Canada and the Federal Reserve slashed rates and enacted large quantitative easing programs early last year, resulting in a sharp drop in borrowing costs. Given that the US conventional mortgage rate is a 30-year rate compared to Canadas 5-year benchmark, borrowing costs fell faster in America as flight to safety flows lowered longer term yields at the onset of the pandemic.
Source:https://economics.td.com/housing-heat-check
CANADA HOUSING MARKET and new stress test
Canadian home sales took a turn in April 2021, declining by 12.5% (sa m/m) from the highest level on record in March 2021. Listings followed suit, falling by 5.4% (sa m/m). While both sales and listings decreased in April, the smaller decline in listings further eased the national-level sales-to-new listings to 75.2% from record high readings earlier this year (the highest being 91% in January). While this is a move in the right direction towards a better supply-demand balance, the ratio is still significantly higher than its long-term average of 54.5%. As a result of this persistent tightness in the housing market, the composite MLS Home Price Index (HPI) rose by 2.4% (sa m/m). This is a deceleration in price gains from paces observed over the last two months, owing in the most part to a slowing in prices for single-family homes and townhouses. Apartments, which had remained relatively close to pre-pandemic levels before accelerating earlier this year have maintained momentum in April.
Movements in the housing market this month continued to be broad-based rather than market-specific, as declines in sales were spread out across much of the country.
The Office of the Superintendent of Financial Institutions (OSFI) also announced that, effective June 1, the minimum qualifying rate for uninsured mortgages (i.e., residential mortgages with a down payment of 20 percent or more) will be the greater of the mortgage contract rate plus 2 percent or 5.25 percent.
