Even in a strong market like ours, there are still some savers out there that prefer to hold on their cash than to put those funds to work with buying a home. Lets have a quick look at comparing owning vs. renting.
To be more accurate for the first time buyer, let’s compare a home valued at $270,000 as most of my first time buyer clients are buying between $220,000 and $320,000.
A two to three bedroom townhouse, is currently renting in Red Deer for about $1,350-$1,900, based on information I found on Kijiji, which is going to put us in the average of $270,000 range.
If you were to purchase the home for $270,000, you would have a payment of only $1,276/month (plus taxes and utilities), based on a 25-year amortization, 5% down payment and an interest rate of 2.99%.
If values went up even only 1%, you’d earn $2,700 on your property, but you’ll also have paid down your mortgage about $9,000, and after the fifth year, you’ll have paid it down over $40,000!
And if values only went up 1% a year for five years your home would be worth $283,500 earning you equity of just over $52,000, can you do that renting?
What I haven’t mentioned yet is the savings that today’s interest rate environment offers you.
Pre-recession interest rates were much higher than today’s, and the average 10-year interest rate before September 2008 was 5.35% (Statscan) for the same fully discounted wholesale rate that’s offered today, go back 20 years for the same period, and the rate is 5.80% (Statscan).
Your parents would tell you even that is a great interest rate!
The same $270,000 house, if rates went back up to 5.35% would cost you an extra $265/month if that was the only thing that changed, meaning an extra $13,600 in the first five years…and that’s all interest cost – which no one likes, and banks love!
Obviously the benefits of owning far outweigh those of renting and interest rates are still amazingly low, if you have the ability to purchase, now’s a great time to do some market research to see if owning is for you.
Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres – Regional Mortgage Group.