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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!
Canada's Manufacturing heavily impacted in March
Manufacturing shipments fell 9.2% in March after climbing 0.4% the prior month. This result was more than double the drop expected by consensus (-4.5%). Lower sales were registered in 17 of the 21 industries surveyed, including transportation (-26.5%), petroleum and coal products (-32.2%), and plastics/rubber products (-10.9%). Alternatively, shipments increased for food manufacturing (+8.2%) and paper manufacturing (+8.4%). With the price effect removed, total factory sales decreased 8.3% m/m, while inventories grew 0.8%. As a result, the real inventory-to-sales ratio rose from 1.56 to 1.72, a bad sign for future production.
Manufacturing sales came in much worse than expected in March, matching their largest one-month decline on record (December 2008). Sales retraced all the way back to their level in June 2016. It should come as no surprise that disruptions from COVID-19 were the chief cause of the decline. Indeed, 78.3% of manufacturing businesses reported being impacted by the pandemic. Transportation saw a significant decline owing to plant closures, while refineries lowered production as demand and prices waned. Not everyone experienced an adverse shock, as evidenced by marked increases for food (groceries) and paper manufacturing (toilet paper) in the month. This will likely be transitory, however, as households rushed to stock up in March. Eight of the ten provinces reported lower sales, with Ontario and Quebec posting the largest declines. All told, given that confinement measures had been in place for only two weeks in March, the April manufacturing picture can be expected to be even worse.
Home sales fell 56.8% from March to April, to the lowest level recorded since the inception of seasonally adjusted data in 1988. The fall was generalized to all the 26 major markets tracked by CREA except Newfoundland and Labrador, where sales rose 13.6%. New listings also fell sharply (-55.7%) but active listings only 8.7%. Therefore, the active-listings-to-sales ratio (our preferred gauge of market conditions) skyrocketed from 4.3 months of inventory in March to 9.2 in April, the largest since the 2008-09 recession.
Source: National Bank of Canada
Another strong increase in the Composite Index in March
In March the TeranetNational Bank National Composite House Price IndexTM was up 0.6% from the previous month. As was the case in February, this was double the average March rise of the last 10 years. Leading the advance were the markets of Ottawa-Gatineau (1.1%), Vancouver (1.0%) and Toronto (0.9%). Trailing the countrywide average were rises for Hamilton (0.4%), Quebec City (0.3%), Montreal (0.2%) and Halifax (0.1%). The index for Victoria was essentially flat. Down from the previous month were Calgary (0.1%), Edmonton (0.6%) and Winnipeg (0.8%).
The index for Vancouver has now gone six months without a decline. Its previous run of 14 straight months without a rise seems to be definitely over, especially since the Vancouver resale market has returned to balance as measured by ratio of listings to sales. The index for Victoria has move little over the last seven months. Weakness persists in the Prairies: the indexes for Calgary and Winnipeg have declined in five of the last six months, that for Edmonton in four. In central and eastern Canada the story is different. The index for Ottawa-Gatineau has not declined in any of the last 12 months, that for Toronto in only one and those for Montreal, Hamilton and Halifax in two. All of these last five markets were at a historical peak in March.
