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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!
Canada: Residential sales reached a new record in September
Seasonally adjusted home sales rose 0.9% in September to a monthly record of 56,422 units. Sales in Ontario missed Augusts record by a hair due to a 5.3% monthly decline in Toronto. Records were nonetheless registered in Ottawa and Hamilton. In the Province of Quebec, sales were at a record level in the Quebec CMA and in Gatineau, and close to August records in Montreal. In B.C., transactions reached a record outside the three main markets of Vancouver, Fraser Valley and Victoria. There were also sales records in Nova Scotia and New Brunswick. The active-listings-to-sales ratio indicates that the Canadian home resale market was favorable to sellers in Ontario Quebec, the Maritimes Provinces and marginally so in B.C. The market was balanced in the four other provinces.
PROMISES, PROMISES AND MORE PROMISES
Canadas Parliament re-convened today with a ceremonial Speech from the Throne delivered by the Governor General. Canadas continued response to the COVID-19 pandemic took centre-stage, while providing a lens for a plethora of broader promises: an extension of the wage subsidy, expanded employment insurance, investments in childcare, reaffirmed commitments to universal pharmacare, and green infrastructure investments among many others. Given the exhaustive list of priorities, this Speech is unlikely to bring the minority government down as it provides plenty of hooks for negotiations in the lead-up to a Fall update where details will be laid out. It clearly signals more fiscal spending ahead for Canada leaving the question not if but how much. But this was largely channeled ahead, so the market reaction has been mutedor more likely, it is eclipsed by broader US and global developments. There is little beyond lip service by way of fiscal restraint. This will be left to the Finance Minister to make inevitable trade-offs in her first budget this Fall, particularly as she may need to reserve some firepower for second waves. Source: Scotiabank https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.fiscal-policy.fiscal-pulse.federal.federal-budget-analysis.federal-throne-speech--september-23--2020-.html