Being a first-time home buyer can be scary, and at the same time one of the most prideful moments you may experience in your life. So why is it now that many people who are renting are afraid of taking that leap into home ownership?
Well, to start it's not just anyone that can afford to purchase a property. Often home ownership consists of some form of financing since not many of us have $300,000 or more in cash to purchase a property without financing. Financing is typically through a mortgage. One big piece of qualifying to buy a home is the down payment. The minimum required here in Alberta is 5% down of the purchase price. One thing to note when a borrower purchases a home with a 5% down payment there is a 4% insurance premium added back onto the mortgage by one of the default insurers (CMHC being the one most recognized). The total mortgage amount including the default insurance is what is used for qualifying purposes on a mortgage application.
So let's say you are looking to purchase a $350,000 home. The down payment that you will require is $17,500. For some this doesn't take much to save up but for others it can take a while to save up, especially, if you have many other expenses like rent, a car payment or student loans to pay off. All of these expenses will be taken into consideration when qualifying for a mortgage but that's another post.
Since it can take while to come up with the down payment to purchase a home many opt to rent until they can afford to purchase. Lately, the thought is the market will go down and housing prices will drop and they will buy then. However, this way of thinking might actually cost you more in the long run if you decided to wait.
You might be asking yourself how? What we are seeing right now as the market shifts and slows from the COVID real estate boom, the spring bounce and the extremely low interest rates is that the Bank of Canada is increasing the prime rate to combat inflation.
How does this affect you and your buying power? To best explain this I will be utilizing the Mortgage Calculator from the Financial Consumer Agency of Canada with example figures.
On average the typical first-time home buyer in Edmonton and surrounding areas is looking for a home between $300,000 and $350,000. Let's use a home with a purchase price of $350,000. As previously mentioned, the minimum down payment for a home with a purchase price of $350,000 is $17,500. Since you have only put 5% down there will be an insurance premium added back onto the mortgage. The remaining balance owing on the home before the insurance premium added back is $332,500. With a 4% insurance premium your mortgage amount is $345,800. The best 5- year fixed rate today is 4.79%. So, with a mortgage amount of $345,800 at an amortization period of 25 years in a 5 year fixed term with bi-weekly payments at a 4.79% interest rate your mortgage payment would be $908.75 bi-weekly.
During your 5-year term you will have made 130 payments and will have paid $40,735.46 in principal payments and $77,402.13 in interest payments. During your 5-year term you will have paid a total cost of $118,137.59. With respect to interest paid you can really only forecast for the first 5 years and not for the entire amortization period as the interest rate at renewal will then adjust that figure moving forward.
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Now let's say you have decided to wait for the market to go down. Thinking that now you can get a house for less money than if you were to buy right then. One thing to keep in mind is the Bank of Canada may continue to increase the interest rate until it reaches an equilibrium with inflation.
Instead of an interest rate of 4.79%, if trends hold and history repeats itself, they may add another 50 basis points or 0.5% to prime bringing the new interest rate to approximately 5.29%.
Now with a mortgage amount of $345,800 at an amortization period of 25 years in a 5-year fixed term with bi-weekly payments at a 5.29% interest rate your mortgage payment would be $954.22. Already your bi-weekly payments have increased approximately $45 bi-weekly.
During your 5-year term you will have made 130 payments and will have paid $38,334.76 in principal payments and $85,714.06 in interest payments. After your 5-year term you will have paid a total cost of $124,048.82.
You are still making the same amount of payments in your term but now you are paying less toward your principal amount and paying an extra $8,300 in interest.
The extra $45 bi-weekly may not seem like a lot but over time that's over $8,000 extra. That's a lot of money that could be better spent on other things like repaying a student loan, car loan, put toward a vacation or for home renovations instead of paying your lender. All because you decided to wait for housing prices to come down.
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To summarize, it's true the Canadian real estate market is correcting itself and home prices are expected to drop from the pre-pandemic prices. To do this and to combat inflation the Bank of Canada has to increase its borrowing rates and has been doing so since March of 2022. The next interest rate announcement will be coming on October 26 and once again it is predicted they will increase the rates, but what isn't known is by how much. The last announcement that came in September saw an increase of 0.5% which was expected. The one before that was in July increased a full percentage point which was not expected (most thought 0.5%).
If you've been thinking to just wait it out until house prices drop in the new year it may be better for you to reconsider and make the purchase now. Everyone's situation is different and it's best to consult a financial planner or mortgage broker for the best course of action for your circumstances.
If you're not quite ready to make the purchase or there isn't anything on the market you're loving but want to take advantage of a lower rate the best option for you is get pre-approved now for a mortgage. This way you can lock in a great rate while you look, you know exactly how much you are approved for and most importantly you won't have to worry about the next interest rate announcement and its possible rate increase as your rate will be held for up to 4 months.
Now is the time to buy! If you're looking for a Mortgage Broker that can assist you with one of the largest transactions in your life give us a call and we will gladly point you in the right direction to one of our preferred partners. When the time is right, we hope that you will trust us in finding your dream home!