Home prices are dropping all across Canada. High market areas are seeing little dips, lower market areas are seeing consistent drops in price as the months tick on. Mortgage interest rates are very low as well, but is now a good time to buy a house? Should you wait until we're at the bottom of the dip? Should you wait until mortgage lenders get a little less strict? I think now is the perfect time to buy, and here is why.
You Never Know Where Bottom Is
This is the same problem you have while waiting to buy a stock at its lowest point – you never know when the lowest point will be. If you wait until you're sure you saw the bottom, it is too late, the prices has started to come back up. Home prices are the same – and because they're listed by real people guessing at what the market is going to do, they'll be just as influenced by the market re-surging as anyone else. If you've been watching home prices in your city for awhile, I'm sure you've noticed that as the summer ended the prices started to go down. If you haven't been, ask a local realtor or two what the home prices have been doing and you'll find out right quick. Even if the market is not at the bottom yet, as long as you're planning on keeping the house for a couple of years, you are almost guaranteed to have home prices be higher when you get around to selling.
Interest Rates Are Low
Interest Rates are very, very low right now. 5 year fixed rates are as low as they have been over the last decade. Chances are good that they'll go back up over the next couple of years as historically the prices will rise and fall. If you wait until the house prices drop even further, you risk losing out on the low interest rates. Unfortunately, banks are not able to offer lower rates once the “rules” have changed. It is like a sale at a retail store, except no one knows how long the sale is going on for or if it will ever come back. Because interest rates are low, even if you purchase a more expensive home now, you'll end up saving more money over the long run because of the low interest costs.
Do the math – once you have figured out your home purchase price max – run it through a mortgage calculator to figure out how much interest you'll pay at 3.09% (current lowest 5 year rate) over 5 years. Then reduce that purchase price by 10% and do it at 4.5 or 5% and see what the total difference is. Is it worth waiting to see if you can get the home for cheaper if it means a higher interest rate? Usually not.
“Building equity” is one of those phrases like “team synergy” that seems to just be thrown around, and no one knows what it actually means anymore. What is basically amounts to is that for every year that you are paying off a mortgage, you are putting money back into your own pocket assuming you can eventually sell your home for as much or more than what you currently owe on the house. If you sell it for less, well, then it will either eat into that “equity” that you have in the home, or you will be “underwater” – where you owe more on the house than what you sold it for.
See, you pay interest on a mortgage, and even at low interest rates it is quite a bit of interest. However, for every year that you pay down the mortgage you pay a little of the principle amount down, meaning that the next year you pay a little less interest. For the house that we bought, for example, we actually will be paying more money in interest than makes it to the principle for the first 2 years. The 3rd year is about even, but then it starts to drastically drop. If we can eventually resell the house for as much or more than what we paid for it, we can then pay off the bank for the rest of the mortgage, and then keep the rest. Delaying the beginning of this process can be good – if you are taking all the extra money you are not putting towards a mortgage into a savings or investment account. If you are not doing that, then consider purchasing a home as soon as you can afford it.
Have you bought a home yet? Why or why not? Do you think now is the right time to buy?