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Christopher Featherstone
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1234 Fake Street, Vancouver, British Columbia
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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!
Forecast Update: Economies Shutting Down
Rapidly evolving developments necessitate an update to the forecasts we published just last Friday. Additional quarantine or shut-down measures have been put in place in a number of countries in the last few days. As a result, we now anticipate global GDP growth to be 0% in 2020, followed by a sizeable rebound in activity in 2021 given our view that economic activity will rebound quickly once the virus is no longer a serious threat to public health. At present, we believe activity will begin to return to normal in the third quarter, except in countries where containment measures were aggressively deployed in the first quarter (essentially the Asian economies), where activity resumes in the second quarter. In Canada, the closure of non-essential business in Quebec and Ontario announced earlier this week will have large economic consequences. At present, we believe Canadian economic activity will fall by 28% in Q2 as these measures are felt. If other provinces follow, the fall in Q2 economic activity would be in the 35% range. We now assume that economic activity resumes by the start of the third quarter and that growth rebounds sharply at that time. However, the 20% drop in US economic activity in the second quarter will restrain the rebound in Canadian activity in the third quarter owing to the usual lags between US and Canadian economic outcomes. Under these assumptions, Canadian GDP would fall by slightly more than 4% in 2020 and rebound by 5.1% in 2021. Though we have not included any additional measures in this update beyond those already announced, we believe a substantial ramping up of fiscal support measures in Canada is forthcoming. There is a chance that aggressive virus management measures are required beyond Q2 to ensure the virus is truly well-contained. Evidence in Asia this week suggests that even in countries where aggressive management measures have been put in place, COVID-19 can come back quite quickly. If measures in Canada are not lifted by the end of Q2, growth would fall again in Q3, and GDP would fall by 6.3% in 2020 instead of the 4.1% we currently expect. A key question for forecasters is the length of the virus-related restrictions on firms and households. As noted above, a shift of one quarter in the resumption of normal operating conditions can have a large impact on growth outcomes. Since we do not have a good handle on the ultimate length of the interruptions, we consider it more informative to assign probabilities to the time at which virus containment measures end. At this time, we believe there is a 75% chance that activity resumes by Q3 and a 25% chance that activity returns to more normal levels by Q4. How officials manage virus containment internationally, as well as the evolution of the virus, will inform our assessment of probabilities going forward.
Source: Scotiabank Economics
Home resale market was gaining momentum prior to Covid-19
At the national level, resale home prices were gaining momentum in February. The 0.4% monthly gain in the Composite index was double the average of the previous ten years for a month of February. In particular, after 12 consecutive monthly declines, Vancouver HPI rose in each of the last five months, reflecting the fact that Vancouver resale market recently returned to balance. Sure, we still saw weakness in other regions, such as the Prairie Provinces (Alberta, Manitoba and Saskatchewan) where markets were still favorable to buyers. But CREA just reported a rather generalized increase in home sales in February, including for Calgary and Edmonton. Unfortunately, then came the outbreak of Covid-19 and its impact on oil prices and disruptions in the supply chain. The unprecedented sanitary measures imposed by the authorities to tackle the pandemic will severely impact business activity and jobs over the coming months. In that situation, the home resale market should be heavily curtailed for the coming months.
Source: Teranet Inc., and National Bank of Canada
