Has your purchasing power increased?
by Sharon Essington
Mortgage Matters | Vol. 28 No. 37 | September 09, 2010 Calgary Real Estate News
Let’s say you are thinking about buying a new home but are not sure if now is the best time. Will housing prices drop lower? What about interest rates? Aren’t they going up? There is certainly a lot to consider.
It is an interesting exercise to look at the house one could buy in today’s market, compared to that 2008. As many remember, 2008 was a cooling off period. Housing prices were decreasing, the market returned to more normal parameters, and buyers relaxed. In fact, the average price for a Calgary Metro single family home in August 2008 compared to August 2010 is almost identical, $440,625 and $445,617 respectively, according to the Calgary Real Estate Board.
But can you qualify for the same house today as you could in 2008? Yes, but you can also purchase much more of a home. I’ll show you why.
Currently, mortgage lenders are offering incredibly low fixed-rate mortgages, which are much lower then those available in 2008.
Looking back to August of 2008, we see that 5.74 per cent was a competitive five year fixed-rate, where as today, borrowers are experiencing rates of 3.79 per cent for the same product. Quite a difference indeed.
Imagine that the Smith family wanted to purchase a home in 2008. They had a combined household income of $70,000, and had saved up a five per cent down payment. Based on the interest rate of 5.74 per cent, they are told they can qualify for a maximum purchase amount of $390,000. The payment on this mortgage would be $2,096 per month, amortized over 35 years.
So while the Smiths did look for a property, they never did find anything that was quite right for them. Then the arrival of 2009 brought some financial uncertainty, so again the Smiths held off. Now here we are today in 2010. The Smiths see a significant number of houses on the market and are feeling much more confident about buying again. They contact their mortgage broker to be sure they can still qualify for the $390,000. They are optimistic considering their household income is still $70,000 annually, and they have been also able to save up a bit more money over the years for their down payment.
The Smiths are shocked to discover that because of today’s dramatically lower interest rates, they can now qualify for $500,000 — an incredible $110,000 increase in purchasing power! Their mortgage broker explains that with five per cent down, and still going with the 35-year amortization, their payments will be $2,100 per month. A difference of just $4 more per month will get them into a home they previously thought out of reach just two years ago.
Do the Smith’s need to purchase a $500,000 home? Not necessarily, but now their options are much broader when considering types of homes available to them.
This example shows how incredibly powerful the low interest rates currently available are to prospective homeowners. If you find yourself in a similar situation to the Smiths, you need to connect with an experienced mortgage broker before these interest rates are gone! Act quickly, you are about to be generously rewarded for your buying patience.