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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!
Bank of Canada maintains overnight rate target at 1 ¾ percent
The Bank of Canada today maintained its target for the overnight rate at 1 percent. The Bank Rate is correspondingly 2 percent and the deposit rate is 1 percent. The global economy is showing signs of stabilization, and some recent trade developments have been positive. However, there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences. The Canadian economy has been resilient but indicators since the October Monetary Policy Report(MPR) have been mixed. Data for Canada indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October. The Bank now estimates growth of 0.3 percent in the fourth quarter of 2019 and 1.3 percent in the first quarter of 2020. Exports fell in late 2019, and business investment appears to have weakened after a strong third quarter. Job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft. In contrast, residential investment was robust through most of 2019, moderating to a still-solid pace in the fourth quarter.
LISTINGS FALL AGAIN TO END 2019, PUSHING PRICES HIGHER
Canadian Real Estate Association data show that national-level home sales fell 0.9% (sa m/m) in December 2019 after rising in the previous nine months. Limited availability looks to be increasingly weighing on sales activity. The month saw another broad-based decline in new listings18 of the 31 centres for which we have data witnessed fallsthat lifted the national sales-to-new listings ratio to 66.9%. It was the highest ratio since 2004 and a third straight month of supply- demand conditions tilted in favour of sellers (after data revisions). Fourteen cities reported sellers market conditions; the rest were balanced. The aggregate MLS Home Price Index (HPI) rose 3.4% (nsa y/y), its best gain since March 2018. Montreal remained Canadas tightest local market, with rising sales and falling listings leading to yet another record-high sales-to-new listings ratio and the citys steepest y/y MLS HPI gains since 2005. Ottawas ratio also reached a new high as new listings plunged by more than 20% (sa m/m), driving a record 12.5% (nsa y/y) MLS HPI increase. Toronto also crept into sellers market territory for the first time since March 2017as in Montreal, home purchases rose and new listings felland its 7.3% (nsa y/y) HPI rise was the sharpest since 2017. Click here for more. Source: Scotiabank Economics