There is something that drives most of us to be home owners rather than renters. It could be that we don’t want to waste money on something that we actually won’t own at the end of the day and/or it is a sign that we are responsible and successful adults. Whatever the reason may be, I would like to share two areas of concern to ensure you are not just following an emotion to own but are thinking about the financial variables of ownership.
One major area to be aware of is employment security. Recently, I have heard sad stories of people that are being laid off or even fired from their job. If the economy slows down and employers are downsizing or closing shop, then a regular paycheck will disappear, leaving little choices in covering the mortgage payment. This is one of the worst case scenarios that we must think about. And whether you are single or in a relationship this is an important question.
Can you afford the monthly mortgage payments if you lose your job for a period of time? This question will help us determine if buying a house is possible. If it is possible, how expensive of a house can be afforded?
Another area to understand is that our Canadian historical 5-year mortgage rates have been under 6% since 2005 (source: ratehub.ca). To give you some background, in the early 80’s 5-year rates were as high as about 20%. With rates being so low now there is a possibility rates increase going forward. When you purchase a home you can lock in your mortgage over a variety of years (1-10 years is common) to have certainty of what your payments will be each month. But once the mortgage is up for renewal then you have to be prepared to take on the interest rate at that time.
Now let’s put a scenario together for us to determine if we can afford a detached home in the Kelowna market.
Points to consider in the hypothetical initial purchase:
- The average price of a home in 2015 is $542,000, according to gethouseprices.ca.
- The posted fixed 3-year mortgage rate is 3.65% with RBC.
- The amortization period is 25 years.
- The down payment is 10% of house price = $54,200.
- The amount to mortgage is $487,800 after the down payment.
The monthly mortgage payment would work out to $2,474.
If rates were to be higher in 3 years once it was time to renew what would your payment be?
Points to consider in a hypothetical future scenario of renewing mortgage:
- $449,768 is the mortgage amount outstanding at the end of year three.
- The posted fixed 3-year rate is now 6.65% or 3% higher than three year ago.
The monthly payment would then work out to $3053 or about $579 more each month.
If you would like to calculate your personal mortgage situation you can go to https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi/start
If you have a financial question, please email me and it may be chosen for my next blog posting.