What a Difference in Five Years!

By November 28, 2012Mortgage News

Back in October 2007, we were offering our clients the best 5 year fixed rate available at that time, which was 5.79%. In addition, clients were able to choose a maximum amortization of 40 years for both insured and conventional mortgages. In Kelowna, the median house price in October 2007 was $466,500.

Let’s consider a mortgage scenario back then. If you had purchased a house at the median price of $466,500, and had 5% as a downpayment, here is what it would have looked like:

Purchase Price: $465,000
Downpayment: $23,250 (5%)
Mortgage Amount: $441,750 plus CMHC/Genworth insurance fee of $14,798.63 (3.35%) for a total of $456,548.63
Interest Rate: 5.79%
Term: 5 years
Amortization: 40 years
Monthly Payment: $2,423.89
Remaining Balance After 5 years: $439,427.60 (with regular monthly payments only)

Now let’s fast forward to today. In October 2012, the median house price according to OMREB statistics was $419,900. We all know that house prices have dropped from their peak in August 2008, so let’s use a purchase price of $419,900 and assume you are able to purchase a very similar house as in the example above. I would like to consider “apples to apples”, knowing that 5 years later, the lower median house price should be an indicator that similar homes are selling for less than what they sold for back in 2007.

Purchase Price: $419,900
Downpayment: $20,995 (5%)
Mortgage Amount: $398,905 plus CMHC/Genworth insurance fee of $10,969.89 (2.75%) for a total of $409,874.89
Interest Rate: 3.04%
Term: 5 years
Amortization: 25 years
Monthly Payment: $1,948.14
Remaining Balance After 5 years: $350,607.54 (with regular monthly payments only)

Notice any differences from the two scenarios? Most of us would take note of the much lower payment in 2012 (a reduction of $475.75!) However, in the 2012 scenario, the amortization is a whopping 15 years shorter! I know we have all been upset at our Federal Government recently for reducing the amortization to 25 years for insured mortgages (30 years still available for conventional mortgages). But still, your payment is almost 20% less AND with 15 years less of an amortization (due to a lower rate and mortgage balance) !

We also have to keep in mind that our house prices are lower today than 5 years ago. Some feel we have hit bottom with house prices in Kelowna while others believe we will start to see a slow increase or perhaps go further down yet. I, for one, cannot predict the timing as to when might be the perfect time one should purchase a home. Most folks who bought 5 years ago are now renewing their mortgage with 35 years remaining. At a current rate of 3.04%, their new monthly payment will drop to $1,696.27 from $2,423.89. What a relief for them I’m sure! Granted, the price they paid 5 years ago may be slightly more than what the same home could be purchased for today but, really, it’s only relative if they are in fact selling it today and possibly only then having to absorb a small loss. As each month goes by, they continue to reduce their mortgage balance and, no doubt, one day will reap the benefits of having substantial home ownership equity.

So is today a good time to buy? If you were here in 2007 and 2008, do you remember how active the real estate market was? Consider the two scenarios above and the choice is yours to make.