With the new mortgage rules introduced in the summer of 2012, it has become more challenging for first time home buyers to get into the housing market. The remaining few who can afford to get in with the minimum 5% downpayment have to ensure they qualify based on 25 year amortization which the maximum allowed for insured mortgages.
For a first time home buyer, putting down 5%, the default mortgage insurance premium is 2.75% which added to the mortgage amount. This leaves the first time home buyer with 2.25% equity in their home. Here is an example:
- Mortgage amount $341,644 (Condo purchase price: $350,000, 5% downpayment)
- Interest rate: 3.04%
- Mortgage amortization: 25 years
- Mortgage term: 5 years
- Accelerated bi-weekly payment: $811.92
The mortgage balance after 5 years would be $283,413. Assuming Toronto condo prices remain flat (data is showing downward pressure on Toronto condo prices since market is in buyer's territory), home equity would be $66,587 ($350,000 less $283,413 or 19% of condo value).
Move Up Buyer
First time home buyers might live up to 5 years in their condos as they prepare for their next home. In the above example, the homeowner will have difficulty in buying their next home due to the following factors:
Real Estate Transaction Costs
- Real estate selling fees: 5% + HST
- Home purchase Toronto land transfer tax
- Home purchase Ontario land transfer tax
- Legal fees to sell and buy a home + HST
- Moving costs
- Miscellaneous (home renovations and touchup, furniture and accessories)
The above would approximately account for 10% of the home price. Here is a link to a National Post article on the effect of moving. This would leave the homeowner with 5% after deducting real estate and moving fees.
Higher Mortgage Interest Rates
Mortgage rates have been historically low and they have nowhere to go but up. There are differences in opinions on how high mortgage rates will be in 5 years but all can agree they will be higher than they are today. Historically, mortgage rates normalize at 5%-6%. Assuming the condo owner will be looking to buy their next home in 5 years time when rates are higher, their affordability will be reduced due to limited downpayment and higher interest rates.
It is crucial for first time home buyers to discuss their goals with a mortgage professional to choose a mortgage product that will serve their long term goals.
To find out how to adjust the mortgage for inflation and build your home equity faster, please visit www.iMortgageToronto.ca
To compare 5 year versus 10 year mortgage, please visit: www.10YearFixedMortgages.com