Recently, I got the question, “should I buy a house now or wait six months?” With the current state of the economy, there is anticipation that home prices may drop in the future. But, we’ve also seen mortgage rates increase as the Bank of Canada brings up its overnight lending rates to pre-covid levels.
So what is the right path? Buy now or wait?
There is no crystal ball in the mortgage world…although I wish there was! When it comes to deciding if you should buy a house now or wait, it really comes down to when the math makes sense for you.
Buy A House Now
The average price of a single-detached home in Edmonton in the first quarter of 2022 was $452,900. Let’s use $450,000 as our purchase price in this example.
|Down Payment (5%)||$22,500|
|Mortgage Default Insurance||$17,100|
|Total Mortgage Amount w/ Insurance||$444,600|
|Mortgage Balance After 5 Years||$388,643.58|
|Interest Paid Over 5 Years||$87,856.98|
|Principal Paid Over 5 Years||$55,956.42|
Wait Six Months
In this example, let’s say you wait six months to purchase. The purchase price drops $10,000 but the 5-Year Fixed Rate increases to 4.64%.
|Down Payment (5%)||$22,000|
|Mortgage Default Insurance||$16,872.23|
|Total Mortgage Amount w/ Insurance||$438,677.93|
|Mortgage Balance After 5 Years||$386,030.81|
|Interest Paid Over 5 Years||$95,086.08|
|Principal Paid Over 5 Years||$52,647.12|
The purchase price may drop $10,000 but your payments increase $65.33/month.
You saved $10,000 initially. But at the end of the 5-year term, there is only a $2,612.77 difference between the $450,000 price at the rate of 4.24% and $440,000 price at the rate of 4.64%.
Other Factors Besides Price and Rate
As I always say, a mortgage is more than just an interest rate.
For simplicity purposes, I based the above calculations on current fixed rates. Variable rates are currently a popular option. Historically, variable rates offer greater interest savings and are starting at discounts of prime minus 0.95%.
At the current prime rate of 3.70%, variable rates are starting at 2.75% which is significantly lower on payments and interest.
If you’re jumping between buying a house now or waiting six months, there are a few other factors to consider.
Rising Housing Costs
While getting into a home could work for you now, you do have to account for the rising prices of goods and services. Maintenance costs, insurance coverage, heating bill—all of these items have increased in 2022.
Perhaps these costs might stretch your budget too thin right now, or you need to reevaluate what kind of property fits in your budget.
Stress Test Changes
Again, I do not have a crystal ball. But, there is strong pressure to make changes to Canada’s Stress Test, making it easier for borrowers to qualify.
The average rates for five-year fixed term mortgages are between 4.19% and 4.25%. With our current stress test, you need to qualify at up to 6.25%. That’s difficult for the majority or borrowers!
If fixed rates increase, this means the stress test rate increases and borrowers qualify for less. If borrowers go with a variable rate, the stress test rate is currently lower at 5.25%.
So, Buy a House Now or Wait Six Months?
I’ll say this. When you want to buy a house, that’s the time to start the process.
When you start the mortgage pre-approval process, I can secure a rate hold of up to 120 days. That means, if rates increase, your rate is secure. If they fall, you can take advantage of the lower rate!