We like to call it a buyer’s market when there is an inventory of homes listed for sale that is beyond the demand of buyers. Typically speaking in Calgary, we consider it a buyer’s market when the absorption rate is in excess of four months. When this happens, as a buyer you will see a great selection of homes and a shift in leverage favouring buyers. These advantages include:
- Greater opportunity for prices in your favour
- Greater flexibility for negotiating terms in your favour
- You may get more house or value for your money
Warning: the following article contains information that may be sensitive for some readers. The intention of this article is not to scare anyone. The information is what it is, however; and the facts are intimidating. The facts scared us to be honest - we were running numbers for our mortgage and real estate clients in this situation and found ourselves consistently relaying this message. It is the type of intimidating information that you need to be aware of if you are on the fence – that is why we are sharing it with you.
Mortgage Qualifying Rule Changes
The most recent mortgage changes are in place and we all have been affected by them. In addition to the rules changes we have also seen mortgage interest rates steadily increase over the past 12 months, which has amplified the negative impact on buying power. Many experts believe the trend of increasing interest rates will continue in the next year – such that fixed rate mortgages could be in the range of 4-5% for a contract rate (what you actually pay) and 6-7% for a qualifying rate (what determines your maximum mortgage). Below is a graph illustrating the impact the mortgage rule changes and increasing interest rates have had on your buying power:
The first thing you notice is the amount of mortgage you qualify for has decreased and will decrease further as interest rates rise. Another obvious picture painted by the graph is that your mortgage payment does not go down with the decrease in the mortgage amount.
Take a look at the difference in how much mortgage you might qualify for in 2018 vs. 2019 – you may qualify for a mortgage of $479,000 in 2018, but only $425,000 in 2019. Now compare the mortgage payment amount for each of those years - they are roughly the same despite the mortgage being about $54,000 less. Will you still qualify for the house you want to buy if the mortgage you’ll qualify for is that much lower? How do you feel about paying the same per month for a house worth $54,000 less than you could have today?
Still on the fence?
Maybe you’re thinking “if I wait a while longer in this market, home prices will go down and be more in my favor as a buyer”. That might be true for the prospective buyer who can pay cash for the home and doesn’t need a mortgage. If you need any amount of financing on the purchase, the increase in interest will still affect your monthly payment.
Consider the following scenarios A and B:
You’re a first time buyer currently paying 1,500/month rent, you have $20,000 saved for down payment, and earn $78,000/year salary. A house you’d like to buy has a market value of $400,000 today in 2018. Let’s say the market value of the same house decreases 5% to $380,000 in 2019. What a deal, right? At first glance yes, the cost of the same home is $20,000 less. How could that be bad for you, the buyer?
First, consider whether you still qualify to buy this house even though the price is lower.
- Scenario A: Using the current qualifying rate in 2018 of 5.34%, your $78,000/year income just qualifies for a mortgage of $380,000, plus $20,000 down. You could have this home today for $400,000 and your monthly payment is $1,950/month using a 3.39% contract rate.
- Scenario B: You decided to hold off thinking house prices will go down. Fast forward to mid-2019, and assume the same house is now at $380,000, and qualifying rate has risen to 6.49%. You now qualify for a mortgage amount of only $350,000, and with your $20,000 down you can buy a home for $370,000. You no longer qualify for that house! Instead, you find a house for $370,000 and your monthly payment is 2,013/month using an estimated 4.49% contract rate ($63 MORE per month for less house).
Second, consider the fact that while in Scenario A you started paying into your home equity today, in Scenario B you were renting and paying 1,500/month that you won’t see again. It’s a good thing the house cost $20,000 less, because you threw $18,000 in rent away during the same period.
Third, what if you are looking at buying a detached starter home now but in a year you don’t qualify for a detached home and you have to consider purchasing a condo? In this case, on top of the higher mortgage payment, you now will be looking at having to pay condo fees which will again increase your costs.
This doesn’t mean you should buy the most expensive home you can qualify for. At SmartBuyCalgary our goal is to help you “Buy Smart”. Our purpose here is to demonstrate whether there is or is not a benefit to postponing home ownership.
For example, look at the cumulative effect of paying 4.49% vs. 3.39% interest for 5 years.
- At today’s interest rate of 3.39% and a mortgage amount of $380,000 your monthly payments are going to be $1,950. Over the 5 year term of your mortgage you pay $54,911 to principle and $62,103 in interest.
- In the scenario where rates are 4.49 in 2019, for the same mortgage amount of $380,000 your monthly payment would be $2,185. Over 5 years you would pay $48,286 towards your principle and $82,822 in interest.
Only you don’t qualify to buy that house anymore.
- More likely, you are buying something smaller and your mortgage amount is $350,000, the monthly payment is going to be $2,013, Over the 5 year term of your mortgage you will pay only $44,474 towards your principle and $76,283 in interest.
If you are not in a position to buy at all right now – in other words you’re “off the fence” - this information will still help you plan as you prepare to jump the fence. If you are “on the fence” – thinking of buying but holding off – this information will hopefully give you fresh perspective on the old question, when is the right time to buy?
The right time is now – and the data backs that up. Give us a call or send us a message, because we’d love to help you. It is what we do! Joseph and JoAnne Purcell 403-612-5298 or 403-519-1167