Did we overpay?
A question at the top of many recent buyers minds. Also a statement coming out of some ‘helpful’ friend or relatives mouths, ignore them… they don’t know how to do math, and also they’re always the black cloud anyways aren’t they.
What follows is math for the 4 in 5 CDN’s that chose a fixed rate mortgage.
Often I write for the variable rate mortgage client, and I will again very soon. Because while variable represents 1 in 5 nationally, it’s closer to 9/10 of my past clients, as well as myself, because I do eat my own cooking.
And yes, in the face of all that’s happening I remain variable, for many valid reasons most easily summed up as ‘life is variable, your mortgage should be too’. However today we look at the fixed rate buyer of late 2021, or early 2022, who feels they’ve overpaid for their home.
Two common refrains in the summer of 2022, as many markets ease from record high prices are;
‘I wish I’d waited until prices dropped… instead I bought at the peak’
Or
‘I’m going to wait and buy when prices drop (even more)’
OK.
But what about the math?
Few among us do the math. I get it, I didn’t like math as a teenager, I don’t love math at 50 either. But I LOVE the results, because the results are interesting.
The math;
Let’s use 20% as our market (price) drop.
Let’s say you bought at 1.5M, or didn’t, and now the home is priced at 1.2M… is it time to buy now?
The bottom line is; it’s always time to buy.
Yesterday’s buyer feels regret, today’s buys feels like ‘it’s deal time’.
Neither is entirely right, neither is completely wrong.
What does the math say?
Buyer #1 – The Regretful
1.5M purchase @ 20% = $300,000 down with a mortage of 1.2M @ 1.75% over 30yrs
Buyer #2 – The ‘Deal’
1.2M @ 20% down and thus a mortgage of 960K @ 5.25% over 30yrs
Buyer #1
Monthly payment $4,287***
Balance at end of term $1,041,048***
Buyer #2
Monthly payment $5267.60
Balance at end of term $883,497
***Buyer #1 has the option of also paying $5267.60 though – to make equal monthly payments, the extra going to principle only, which results in a reduced end balance of $979,240
If both #1 and #2 both make the same payment of $5267.60, things get interesting. And why shouldn’t they make the same payment? Buyer #1 was stress tested at 5.25% and thus qualified to make that payment.
In doing so, Buyer #1 (Mr. & Mrs. Regretful) paid $300,000 more up front, yet their mortgage balance at renewal is just $95,293 higher.
Yes, I had to check the math three times as well. It’s accurate.
Keep in mind Buyer #1 put $60,000 more down at purchase, so combined the home is ~$155000 more expensive, not $300,000. Such is the power of compounding at a vastly lower interest rate than Buyer #2
But wait there’s more…
Speaking of waiting, while Buyer #2 was waiting… aka renting for say 12 months through 2021 and into the summer of 2022, they had to live somewhere, presumably in a comparable home to what each buyer bought. And while doing so they were likely paying a median rent of ~$4,000 per month for that 1.5M property. (closer to $5,000 today)
That’s another $50,000.00 strike against Buyer #2 and their ‘deal’.
Did buyer #2 really save 300K by waiting for the price to come down 20%?
No.
The net savings is closer to $100,000 which isn’t nothing, but it’s not $300,00 either is it.
So take some solace Mr. & Mrs. Regretful, stop beating yourselves up. You bought a home you love (I hope) that works for you, and got settled in 1 year ahead of Buyer #2. You know your neighbours, finally got a dog, painted a wall a fun colours, etc.
And that’s worth something.
My hope is that this post saved you $200,000 in its own way.
Feel better!
This (dip) shall pass.
Bottom Line; there’s no wrong time to buy (in the GVA) but there’s a wrong time to sell, and historically the wrong times haven’t lasted very long… we’ve consistently headed to new highs yet again. Despite that friend saying ‘this time is different’ – ya, sure it is.
The value valley can be much wider from peak to peak in the GTA, history has shown us this. So this post is largely for my local folks here in BC.
Predictions are difficult, especially about the future.
Enjoy the pause, catch your breath… paint a wall a fun colour – just because you can!
Or, if you’re not yet in the game, get in the game!
Because renting and waiting, that’s the riskier bet. Just ask anyone who did so in 2020, 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012… you get the idea. The spike upward hits hard and fast.
Waiting is almost always the wrong plan.
DW
P.S. If you’re interested in a recent monlogue re the BOC’s July 13th 1% hike… here’s the video version. The written version is available HERE via LinkedIn.