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High home prices or high interest rates: Which is preferable?

With yesterday's BOC rate increase, it's worth reviewing how these factors influence your total amount owing over the full mortgage term
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It’s no secret that a housing crisis is sweeping the nation, but when it comes to the fine details, some of the truths can get lost in the noise.

This is where Mortgage Wellness comes in.

For years, Mortgage Wellness has helped homeowners afford ownership despite a variety of market conditions.

Today Nick L’Ecuyer, Principal Broker, answers an important question: which is better, high home prices or high interest rates?

This question is pertinent as Bank of Canada introduces the new interest rate of 3.75%.

To answer this question, L’Ecuyer, uses an example:

Couple A buys a home in January and they pay top dollar for it – $999,999. However, they get a great interest rate of 2% (5-year fixed rate of 2%, 25-year amortization). Couple A’s mortgage payment is $3,929.20/month.

Couple B buys in September and gets a lower home price, $850,000, but a fixed interest rate of 5% (5-year fixed rate of 5%, 25-year amortization). Couple B’s mortgage payment is $4,497.26/month.

Over the five-year term, the couple who bought in September will make $34,083.60 in more payments than the couple who bought in January. But this does not tell the full story.

The couple that bought in September will actually owe less than the couple that bought in January – substantially less. Couple B will owe $92,919.92 less on their overall mortgage in five years than Couple A, even though Couple B has the higher interest rate.

After five years, Couple A owes $777,303.41 on their mortgage, but Couple B owes $684,384.49. Couple B, therefore, comes out ahead overall.

The moral of the story? High interest rates can be alarming, but they don’t tell the full story.

Do not simply assume home ownership is out of reach based any individual factor. Speak with a mortgage broker today who will crunch the numbers and offer both traditional and unique financing solutions.

If you are in the market to buy, sell or just want to know your options, contact Mortgage Wellness today.