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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!
Unemployment rate unchanged in October
Following two consecutive months of growth, employment held steady in October. The unemployment rate was unchanged at 5.5%. On a year-over-year basis, employment grew by 443,000 or 2.4%, driven by gains in full-time work. Over the same period, total hours worked were up 1.3%. In October, employment increased in British Columbia and Newfoundland and Labrador, and was little changed in the other provinces. Employment was down for men in the core working ages of 25 to 54, and grew for the population aged 55 and over. Employment declined in manufacturing and construction. At the same time, employment was up in public administration and in finance, insurance, real estate, rental and leasing. The number of self-employed workers decreased, while the number of employees in the public sector increased for the second consecutive month.
Canada: Household Credit Growth Continues To Climb in September
CANADIANS BORROWING HAND OVER FIST Total Canadian household credit growth continued to accelerate in September, reaching a pace last seen in mid-2018. Despite a slight deceleration from the previous month to 4.3% at a seasonally adjusted annualized rate (m/m saar), trend growth remains at elevated levels. Both mortgage and consumer credit growth contributed to the 68 bps slowdown from the prior month (46 bps and 22 bps, respectively), but borrowing conditions remain favourable overall with trend growth still in strongly positive territory. RESIDENTIAL MORTGAGE CREDIT EXPANSION CONTINUES ITS ASCENT Residential mortgage credit growth continued on its upward trajectory in September supported by favourable borrowing conditions and strong labour markets. Mortgage loan growth accelerated by 4.9% m/m saar in September, pushing the year-on-year trend growth rate to 4.2% y/ythe fastest pace since mid-2018, marking a well-pronounced recovery in the mortgage-borrowing market. Canadas real estate market looks to be rebounding following a turbulent couple of years due to various policy announcements from 2017 to 2018 designed to cool the market. Mortgage borrowing has picked up through the second half of 2019 with the uptick in demand following a reduction in the mortgage qualifying rate in July and a decline in 5-year mortgage rates. With the Bank of Canada under pressure to continue to provide a stimulative environment following sustained levels of uncertainty, residential mortgage credit growth is expected to remain supported in the foreseeable-future. Strength in Canadian labour markets has also been conducive to a favourable borrowing environment. Septembers surge in job gains contributed to a fall in the unemployment rate to 5.5%. Source: Scotiabank