Interest Rates on the Rise

[Duncan]

Need opinions on buying now or later...

So i've been periodically monitoring mortgage rates over the past year or so and the trend i'm seeing makes me feel uneasy. Everyone knows that the interest rates are on the rise so is it a time to buy or not?

I've kinda broken it down as follows:
$300,000 home
35 year amortized period
bi-weekly payments
5% down (+cmhc premiums) now vs 20% down 2 years from now
5 year fixed term
(mind you i'm not taking into account things like utilities, prop tax, etc since i'd have to pay those anyways. I'm just comparing 5% now vs 20% down later)

The cmhc for insuring 95% of the mortgage (since i'm considering 5% down) is a 2.75% premium + an additional 0.40% = 3.15% ontop of the mortgage.

CMCH factoring:
5% down means that the mortgage is $285,000 * 1.0315 = $293,977.50 mortgage (meaning cmhc cost $8,977.50)
20% down means that the mortgage is $240,000

Currently, say i go with TD for my mortgage, the 5 year fixed rate is 4.04%. Now lets assume in the next 2 years, it may rise to 5%, 6%, or even 7%.

Here are the numbers.

5% down today with a $293,977.50 at 4.04% fixed mortgage payment numbers:
Bi-weekly payments of: $601.29 over 34.8 yrs
Term Interest Cost: $56,569.50
Amortization Interest Cost if rates miraculously stay at 4.04% for 35 years: $249,928.80

20% down two years from now with a $240,000 mortgage at 5% fixed payment numbers:
Bi-weekly payments of: $555.42 over 34.7 yrs
Term Interest Cost: $57,378.28
Amortization Interest Cost if rates miraculously stay at 5% for 35 years: $261,074.42

20% down two years from now with a $240,000 mortgage at 6% fixed payment numbers:
Bi-weekly payments of: $626.13 over 34.6 yrs
Term Interest Cost: $69,062.94
Amortization Interest Cost if rates miraculously stay at 6% for 35 years: $322,791.45

20% down two years from now with a $240,000 mortgage at 7% fixed payment numbers:
Bi-weekly payments of: $699.91 over 34.4 yrs
Term Interest Cost: $80,745.04
Amortization Interest Cost if rates miraculously stay at 7% for 35 years: $386,101.95

As you can see, here's my dilemma. As you can see, as the interest rates go up, paying out almost 9k in cmhc now kinda gets offset by the cost of a higher interest rate if i don't get in the market now. Even if prime goes up by only 1 percent to 5% in the next two years, over a 5 year term, i end up paying almost the same amount of interest cmhc be damned.

If in two years, doing 20% down and fixing a 5 year term has a rate of 6% instead, i end up paying higher monthly payments than i would've paid had i put 5% down now at a lower interest rate!

Somehow i'm leaning towards not saving up 20% and getting in the market asap because of interest rates.

I know my numbers have a lot of holes i haven't accounted for so please add your 2 cents. Basically i meant to post this to get the numbers out there so i can have a better look at my options and see what others have to say about it.

[Wetundies]

They aren't going to rise interests anytime soon.

1 year fixed is 2.2% right now.
2 year fixed is 2.3%
5 year is around 2.8% can't remember. These are the discount rates, not the bank posted rates.

[Wetundies]

And houses in Victoria are expected to fall 7%, there could be a deal there!

[Duncan]

[joel]

The difference in cost are skewed when you look at it over a 35 year period.

Since you can only lock in your rate now for at most 5 years, maybe 6 depending on the bank. Over a 35 year period the rate for only the first 5 years play less of a significance than what you have calculated out. Calculate the interest cost only over the first 5 years of your mortgage then do the comparison.

Also important to know is a bank may not give you a loan for 95% of your purchase home. I think Jairo once told me that the typically approved mortgage loan amounts are 3.5 * annual salary. This may be stretched depending on credit history, and other assets you may own.

[Duncan]

[nature boy]

don't forget also in 2 years you most likely will be making more money than you are now (and maybe alicia would be too).

having said that, i once read that the day that you should get into the market is on the day that you are sure that you can afford it. as in, the sooner the better, but don't break the bank by doing it thinking that you can afford it when you can't.

it's like when i bought my first gti, i had the income to pay for it and insurance, but i didn't account for all the other things like gas, food and other bills. not saying that you can't afford it, but i think i'd feel more safe when there are two people earning a stable income first.

[joel]

your mortgage payments are not equal over your comparison's either. That will have a direct affect against the the interest cost over the mortage period.

[nature boy]

i'm thinking that you should probably talk to a banker instead of forum lurkers.
this is a huge purchase and commitment, our 2 cents is probably not even worth 2 cents.

[Duncan]

[joel]

you probably want to look at the whole thing at a financial perspective of over 5 years real time.

I assume that you have it work out already that saving for 2 years will get you the 15% extra down.

Model 1:
Pay 5% down. Fixed Rate at 4.04% for 5 years

Model 2:
Pay 20% down. Fixed Rate at ?% for 3 years.

I think at this point, you look at the financial situation you are in. How much is left owing on your home too. I have a feeling that after 5 years you still have more paid off on your home when you started at 20% then when you started with 5%. With you mortgage payments above in the second option you save about 140/month. Give a 2 year delay that equals 3 years worth of savings that amount 140*12*3 = ~5k. Which can be applied directly to the principal of your loan. Which would also cut down your savings amount.

There is probably a breakpoint in increase interest rate that makes it more worthwhile to invest sooner than later based on your calculations so far I would gather the rate going up somewhere between 5-6%.

[joel]

It definetly doesn't hurt to start looking at houses now though. Perhaps the best opportunity to save the most amount of money is finding the right home for the right price...

And with purchasing anything the best is to shop around. Put lowball offers on places... you never know.

Any amount that you can save directly off the price of the home is huge and you don't pay any interest on it...

Apparently, lately there has been a lot of buzz about these for sale by owner homes which cut out the real estate agents and a lot of the commissions and fees they normally make.

[Duncan]

yea, i guess i'm looking for that breaking point.

Also, another note that i haven't factored in is the fact that i'm renting as we speak. So that rent money is technically going nowhere... well, it goes to alicia's parents, but it's money that's not contributing to my house..

[jeSteR]

Wait. if you want more clarification, we can take it offline.

[Duncan]

offline or online, i'm up for discussing this topic either way. I just want to benefit from the experience those of you who have mortgages have.

It's just frustrating when there are those who just generally tell me "it's always best to just save up 20% and put more down"... which i know is a general blanket statement too.. but i mean, it's not always true. It's like the old school chinese thing to do by stuffing all your savings into your bank account and not doing anything with it. Saving is good sure, but knowing how to make the most of what you have is something even Jesus taught us by the parable of the talents. Being shrewd with what we've been given comes straight from the bible...