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556677
Christopher Featherstonhaugh
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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!
Almost no annual growth for national HPI
The national HPI has grown at a below-inflation rate of 0.5% over the last 12 months, the smallest gain since November 2009. Moreover, the fact that monthly gains are reported for May and June does not mean that the market recently turned the corner. These two months typically register the strongest growth rates in a year. Indeed, the two latest rises were among the weakest in history for months of May and June. If seasonally adjusted, the national HPI would been down in both months this year. However, the weakness is not regionally broad-based. The national HPI was dragged down by 12-month home price declines in Western Canada metropolitan areas (Vancouver, Calgary, Edmonton and Winnipeg) and a tiny increase in Victoria. In Central Canada and in the East, home price growth ranges from decent to strong (left chart). This is consistent with the state of home resale markets. For example, the Vancouver market turned favorable to buyers at the end of last year, while the Toronto market remained balanced and Montreal’s market has never been this tight since 2005. That being said, a rebound in home sales recently occurred in Canada which was also felt in the largest Western metropolitan areas. This should help limit home-price deflation in these areas.
The Teranet–National Bank Composite National House Price Index increased 0.8% in June, a second gain in a row after an eight-month string without a rise.
Highlights:
On a monthly basis, the index rose in 8 of the 11 markets covered: Winnipeg (0.1%), Quebec City (0.3%), Montreal (0.8%), Toronto (1.3%), Halifax (1.5%), Hamilton (+1.6%), Victoria (+2.1%) and Ottawa-Gatineau (+2.2%). The index was down in Calgary (-0.1%) and Vancouver (-0.3%), and flat in Edmonton.
From June 2018 to June 2019, the Composite index rose 0.5%, the smallest 12-month gain in ten years. The HPI declined in Vancouver (-4.9%), Calgary (-3.8%), Edmonton (-2.6%) and Winnipeg (-0.4%). It was up in Victoria (0.3%), Quebec City (1.5%), Halifax (2.7%), Toronto (2.8%), Hamilton (4.8%), Montreal (5.4%) and Ottawa-Gatineau (6.3%).
Source: National Bank Financial Markets; Marc Pinsonneault
NORTHERN STAR (FOR NOW...)
In contrast to the US, Canadian growth is accelerating sharply going into the second quarter, following a solid gain in domestic demand to start the year.
Fast, and accelerating, population growth, and remarkably strong employment growth are providing a solid underpinning to consumer spending and the housing market.
Positive export data suggest that the ongoing strength in domestic demand will be buttressed by net exports in the second quarter, and possibly beyond.
Canadian inflation is at the Bank of Canadas target, in sharp contrast to the US, where it has moved away from the Feds objective. This gives the BoC room to keep rates on hold if inflation remains on target.
Downside risks remain important and are all linked to US-centric developments, with worries about US trade policy ongoing despite the pause with China.
Recent Canadian developments stand in sharp contrast to events in much of the rest of the world. Whereas US growth is clearly decelerating, Canadian growth is on an upswing, with recent indicators pointing to a very sharp rebound from a somewhat sluggish start to the year. Canadians appear to be, for the time being, largely insulated from the broader malaise facing the global economy as consumer and business confidence has improved sharply in recent quarters, owing to strong sales and job creation. While there are a number of factors suggesting that the growth rebound observed will persist through 2020, there is a risk that a divergence between Canadian and US outcomes may not last.
Source: Scotiabank Economics
