Overview and Tips on Getting Pre-approved for a Mortgage
My goal is to help you realize your dream of owning a home! This is a decision that requires a lot of research and insight, and I am here to provide you with the right tools to succeed.
This is Part 3 of a 11 part series that I will share with you weekly. If you want to read the previous step, please click here.
3. Consider a Smaller Down Payment
Remember when we said that our first time home buyer would have to put $51,330 down on a house worth $763,300? Well, by purchasing a more affordable home, our down payment can fortunately be a lot cheaper as well. Part of the reason our buyer’s down payment was so high is because they can only put down 5% on the first $500,000, and for the remaining $263,300 they were required to put down another 10%. That means their down payment for the last $263,300 ($26,330), was more than their down payment on the first $500,000 ($25,000). However, going back to our new example of starting with a smaller home, 5% of $421,000 is about $21,000, less than half of the cost of the original down payment we started with ($51,330). Keep in mind, any down payment below 20% will require mortgage insurance, so with 5% down at the current CMHC insurance premium rate of 4%, that would be $16,000. However, this cost would be added to your mortgage, so you don’t have to pay it up front. With that in mind, there are a few potential benefits of getting into the market sooner rather than waiting to save up more.
Firstly, this allows you to take advantage of the price appreciation of your first home sooner. While it’s true that the cost of housing prices can go up or down in any given year, the common trend is up. In Victoria, that trend has been a steady increase over the past 40 years with an average annual appreciation of 8% per year in recent years - and over 20% for most properties in just the last year! While there is no guarantee that your new home will continue to appreciate in any given year, let’s compare our annual appreciation of 8% to the worst global housing crisis in recent decades. In Victoria, the notorious housing crash of 2008 saw a real estate dip of about 10%. It eventually recovered within 2 years and the price loss only directly affected those who sold during that time period. So, in the worst case scenario, let’s assume our buyers purchased their new home at the peak in 2007. Using the same numbers as before, it’s true that their property value of $400,000 would drop to $360,000 within a year. However, it would recover back to it’s full price by about 2009 or 2010. Taking the longer view, by 2017 it would have then appreciated by about another 30% to $520,000. So, for most people buying for the long-term, the question becomes when do you want to get into the market: before or after this price rise?
While capital gains from property appreciation is currently the sexy topic that most people like to talk about, it’s not the only way you can make money from being in the real estate market. The second thing to consider is the advantage of building equity over time. If your first home purchase has a mortgage of $400,000 assuming a current mortgage rate of 2%, that’s over $12,000 you’ll put into your own pocket in the first year just by paying your mortgage. Over five years you’ll have paid yourself over $60,000 in equity by simply maintaining a very manageable monthly mortgage of under $1700 per month. By comparison, if you were paying $1700 in rent each month, your landlord is never going to give you a $60,000 rebate cheque just for being a good tenant over the last 5 years.
The third financial advantage to consider with getting into the real estate market sooner rather than later is the opportunity to generate passive income in the future. Let’s say you buy a 1 bedroom condo for $421,000 and hold it for 5 years. For argument’s sake, we’ll assume that, despite historical trends, the market stagnates and your property gains no real value in that time. You still gain $60,000 in equity over that period and you’re able to save up to buy a larger house. At this point, you’re probably in a better financial position than before. You’ve had time to progress in your career, so you’re probably making a bit more money, you’ve had time to pay down debt and save a little more and you’ve built up equity in your current home, meaning your net worth has increased and your housing expenses may be a bit cheaper since you’ve been paying down your mortgage. As a result, you may now be in a position to buy a second home without having to sell your condo. At this point, you’re now in a position where you can buy a new home and rent out your first property in order to generate a bit of passive income. As a result, you’re now gaining from someone else paying down your mortgage, and you may have an extra $200 per month in extra cash flow coming in.
Stay tuned for part 4!
I am a Victoria based local realtor with eXp Kiteke. My commitment to honesty, integrity, loyalty and hard work have been important pillars for me because they drive a high standard of excellent service for my clients. Helping you realize your dream is my goal!
I service Vancouver Island, but my focus is on: Victoria, Sooke, Saanich, Malahat, Shawnigan Lake, Cobble Hill, Duncan, and the rest of the Cowichan Valley.
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