Home buyers… are you waiting for prices to correct?
One thing that is probably fairly
certain is that a dramatic increase in mortgage interest rates would cause a
decrease in home prices. Why? Because buyers DO NOT buy a home for $650,000
(although they think they do), they buy a home for $2,875 a month for their
mortgage, taxes, utilities and insurance, which is what they really pay to live
there.
So let’s do the math. A $650,000
purchase price with 20% down and a 5 year fixed rate mortgage at 2.99% with a
30 year amortization will cost about $2,184 per month principal and interest.
If mortgage rates go up to 4.5% and
this causes a reduction in prices by 10%, your $650,000 home will now be
$585,000 and with a 20% down payment and a 5 year fixed rate mortgage at 4.5%
and a 30 year amortization, the monthly payment will be about $2,359 per month.
So now they have had the pleasure of
living in their rental apartment for an extra year or two while waiting for
prices to fall, and have ended up paying more each month for the same house.
Finally, what if all the supposed
experts are wrong and prices do not fall and interest rates do not go up? Well
in keeping with historical price increases in Toronto, you can expect prices to
rise at approximately 5% per year, so your $650,000 home is increasing at over
$30,000 per year.
The message is clear, just like the
stock market, it is very difficult to time the real estate market and those
that try often end up on the losing end. You are buying a home that will also
prove to be a good tax free investment, but remember that it is primarily a
home and the sooner you can cross that threshold, the sooner you can start
enjoying all of the benefits.
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