Mortgage Terms And Other Factors That Affect the ‘Time to Buy’
There are a number of reasons to buy now, and a number to buy later–including mortgage terms, total cost of ownership and overall finances.
Interest Rate, Mortgage Terms and Total Cost of Ownership
A good friend of mine was in Ontario a few weeks ago visiting family and came across an article on the housing market, and an impending crash.
The ensuing conversation between him and I when he returned inspired the topic for this blog post.
The purpose of the exercise:
To determine the total cost of home ownership
In the past, I have showcased the difference in monthly payments and mortgage terms if you wait for home prices to decrease.
We will use the price of an average detached home in the Vancouver area for our illustration.
Historically, as home prices have decreased, interest rates have increased.
(we are going to stick with this assumption for our latest illustration)
Let’s start out by looking at a price drop:
If we assume that the mortgage terms and rates do not change, then it is clear you are better off waiting and buying later.
But it is important to note that historically, when prices have fallen we have seen an increase in interest rates. The buy later payment with the rate hike actually increases further than the buy now payment with the lower rate and higher purchase price!
What about in the case of a price increase?
In looking at the illustration, you may be thinking that there is an error in the calculations. Above, we mentioned that when prices decrease, historically interest rates have increased. Would it not be a reasonable conclusion to assume the same that if prices go up, that interest rates would come down?
Under regular market conditions, I would agree. However, for the last few years as many of us are aware, we have been in a state of emergency interest rates. We have enjoyed and benefited from historic lows and favourable mortgage terms.
This trend cannot – and will not continue. At least that is what all of the experts and the policy makers are telling us. In fact, over the last few months (since the end of May and beginning of June) we have witnessed the steady rise of interest rates.
More recently, policy makers have predicted that these low rates will be around for a little while longer. But they still caution that one thing is for certain, that rates will go up (eventually)–which is why choosing ideal mortgage terms is important, in addition to rates alone.
I’ve always said, that if you are in the need of a place to live in, the best time to get into the market is now.
What do the above calculations mean to you? Questions….comments…..would love to hear your thoughts!