If you’ve been thinking about buying a new home, you’ve probably read newspaper articles about how housing affordability is improving. But what does this really mean?
For most homebuyers, the “bottom line” is what they will have to pay, each month, to own their home. This is determined by two things: the price they pay for their home, and the interest cost of their mortgage.
Today, if you look at prices without considering mortgage interest, you could be missing a great home buying opportunity. Here’s why:
Just two years ago, at the end of 2007, the average posted interest rate for a five-year fixed-rate mortgage was 7.49%. Today (March 26/09) lenders are offering the same mortgage for just 4.25%.
What this means is your monthly mortgage payment today will be 26% less than in 2007!
Here’s an example. According to Canada Mortgage and Housing Corporation (CMHC), the average home price in Canada in 2009 is expected to be $287,900. If you purchased a home for this price with a 5% down payment, you would require a mortgage of $273,505.
At the 2007 five-year fixed rate of 7.49%, a mortgage for this amount, amortized over 25 years, would mean monthly payments of $1,999.
At today’s low 4.25% rate, you would pay only $1,476 for the same mortgage. That amounts to saving $523 each month, or $6,384 each year, or $31,920 over the five-year term.
Conversely, if you decide to pay what you would have in 2007 – $1,999 per month – you can fully pay-off your mortgage about nine years sooner. This would save you more than $150,000 in total interest charges.
Mortgage lenders offer a number of other mortgage options, some of which can save you even more each month.
That’s what “improved housing affordability” means – today you can own a home for less money each month.
So why is right now the right time to buy? According to CMHC, “(Mortgage) rates are expected to remain low in a historical context, but climb higher later this year and in 2010”. So there is a good chance that the great mortgage deals being offered today won’t last.
If you want to own a home, and get monthly payments that are 26% less than two years ago, take a look at a new home today.