Guest article by Dara Fahy A.M.P.
Mortgage Planner with Dominion Lending Centre City Wide Mortgage Services
If you were to ask Simon or Sayaka the question they are asked most, I would guess nine times out of ten you’ll get the answer: “Is it a good time to buy?”
Now I’ve been asked the same question quite a bit recently, but in my case of course, the question is being asked from a mortgage perspective.
Time in the market, versus timing the market:
Recent increases to mortgages rates, coupled with strict adjustments to qualifying rules, has caused the market to cool off in the past 12 moths. The question is where do we go from here? No-one can say for sure, so I think it’s important one does the right thing for their situation. As long as you take a long-term approach with a time horizon of 5 to 10 years, I believe purchasing real estate now is still a great decision. As I always say to clients, time in the market is more important than timing the market. To illustrate this, I will use a personal example:
My wife and I purchased our current house in 2007, at the height of the market for that current time. I recall being very uncomfortable making a subject free offer, higher than the asking price. When the offer was accepted, I was momentarily excited and then what followed was a panic. The thought that got me through it was that even if I overpaid, I can afford the payments. Low and behold, in 2008 the U.S. had their mortgage and credit crisis and we went through a recessionary period here in Canada. Our house was suddenly worth MUCH less than we paid for it. As uncomfortable as that was, it was short lived and within 3 years the market recovered nicely. Fast forward to today, the assessed value of our home is worth far more than the purchase price that made me so uncomfortable. The moral of the story is that if you have the time horizon and can comfortably afford the mortgage and costs associated with owning a home, you can buy with confidence.
Its All Relative:
Another factor to consider is that everything is relative. If we look at the main driver of a further market decline, it would likely be rising interest rates. If you were to wait for further price drops to buy, you could well be paying a higher interest rate on your mortgage, which could offset the price savings.
At current rate levels, you could get a 5-year fixed-rate mortgage for as low as 3.69%. Total interest paid over the 5 years would be $104,595 based on a mortgage of $600,000 (assuming a purchase of $800,000 with a down payment of $200,000 or 25%, for the purpose of this discussion).
If you were to wait a year or so and find that the market ‘corrects’ or pulls back by 5% say, the same property could be bought for $760,000, but may well come with a 5-year rate of 4.69%. Total interest paid over the 5 years at this increased rate would be $133,655. The difference in interest of $29,060 would wipe out over 70% of the 5% savings on the purchase price.
So the real question is: will you need a mortgage?
If you don’t, or don’t wish to obtain one, then it may be worth trying to time the market to your advantage and hold off for awhile on your purchase, to see how things play out.
But, if you are like most and will require a mortgage, and rates increase and prices drop, it appears to be somewhat of a wash from the financial side, using the example above, at least for the 5-year term of the mortgage.
If you’re looking to purchase your first home, be sure to consult with a mortgage planner, to establish a budget that is comfortable for you over the next 5 to 10 years. Provided you stay within that budget and choose a mortgage product that is a good fit for you, I believe that it’s a great time to purchase real estate.
Dara Fahy is a top mortgage broker working with homebuyers in Greater Vancouver with Dominion Lending Centres City Wide Mortgages. You can get in touch with Dara for more useful advice here.