A mathematical argument for purchasing a home today.

A mathematical argument for purchasing a home today.

Although prices in many areas are close to where they were during the 2007/2008 period, the average 5 year fixed mortgage rate through 2006 into late 2008 was approximately 5.5%.

Today we are closer to 2.89% – with some variation depending on client circumstance.

Here are some numbers for your consideration;

These numbers reflect CMHC lending policies of the time

Mortgage $  Rate  max AM     Mo.Pymt    5yr interest    5yr paydown

$100,000      5.5%   40 year        $511.56          $26,677.91        $4015.69

$100,000     2.89%  25 year        $467.62          $13,350.40       $14,706.80

Lets look at an anecdotal example of a family purchasing a single-family home for $550,000 (perhaps in the Fraser Valley, a market that is seen very little appreciation in price over the past five years).

Back in the days of 5.5% interest rates, even with the 40-year amortization, assuming no other debts and excellent credit, a gross household income of $90,000 would’ve been required to qualify a 5% down-payment.

In today’s world of 2.89% interest rates one might think just about anybody qualifies.  The reality is, again assuming no other debts and excellent credit, a gross household income of $95,000 is required to qualify with 5% down.

The numbers below assume that the mortgage insurance premium (~2.75% @ 5% down) has been added to the mortgage, as is done in greater than 95% of cases.

Mortgage $    Rate    max AM     Mo.Pymt    5yr interest    5yr paydown

$536.868.75     5.5%    40 year          $2746.40     $143,225.35       $21,558.65

$536.868.75    2.89%   25 year          $2510.50     $71,674.02         $78,955.98

**make the 5.5% payment to today’s mortgage (something I encourage regularly).

Mortgage $    Rate    max AM     Mo.Pymt    5yr interest    5yr paydown

$536.868.75    2.89%    25 year        $2746.40    $70,626.54        $94,157.46

Although it takes about 6% more income to qualify for the same mortgage amount today, (even though the actual monthly payment is lower) clearly there is a significant advantage in making a purchase at today’s interest rates versus those of five years ago.

Applying yesterdays payment to today’s interest rates takes your principal reduction from $4311.60 per year back in 2008 to $18,831.49 per year today.  Phenomenal!

The argument could be made that pricing is not flat, in fact the home that you would pay the same purchase price for today as five years ago could in fact cost you over $72,000 less due to the reduction in interest expense.  So the deal today is better on the same house at the same price 5 years ago.

I use the five-year fixed rate in the above examples for simplicity, the fact is that a five-year fixed rate mortgage product is often not the best choice for purchasers.  Consult with your mortgage broker for a full personal analysis of which term and product are correct for your circumstances.

Click these links for more information and opinion on the topic of term;

http://dustanwoodhouse.ca/mortgage-terms-fixed-variable-open-closed-term

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/are-mortgage-rates-going-to-rise-or-fall/article10598447/?cmpid=rss1

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2013/04/the-unsung-one-year-mortgage.html

Moving forward interest rates could, and eventually will, rise and there is much to be discussed about what that actually looks like for the buyers of today.

The mathematics of this will likely also be surprising to many.  I will be exploring those numbers in a future post.

Thanks for your time.

Dustan Woodhouse

www.ourmortgageexpert.com

AMP – Accredited Mortgage Professional

PH# 604.351.1253

Fx# 1.877.797.8692

Related Posts