April 3, 2009
Take advantage of low interest rates, don’t let them take advantage of you
Spring is here and the peak season for house hunting is upon us. Mortgage rates are quite low making the prospect of purchasing a new home, particularly your first, very enticing. The downside to looking while the interest rates are low is that the vendors are psychologically not prepared to lower their asking price. They erroneously believe that the market will support higher prices because of the lower interest rates.
Real estate agents are actually listing the properties above their real market value. In today’s competitive market they are promising the vendor, the moon, and stars just to get them to sign an exclusive mandate. A vendor looking to sell their home is not necessarily hiring the most competent real estate agent, but the one that will promise them the highest return. This of course explains the refrain heard from every agent as they hand you their listing. “Don’t worry, the price is very negotiable”. I assume that once they have the listing they feel more comfortable selling the lower price to the vendor.
The truth is that you can in many cases negotiate a lower price on the property but keep in mind that the negotiations should only be with the vendor and not with yourself as well. As I write this article you can get a five year fixed rate as low as 3.85% and a five year variable at 3.30 %. These are extremely low rates which have not been seen in years and so I feel compelled to offer you a tiny bit of advice. When you are calculating how much you can afford, do not necessarily listen to the banks when they calculate your maximum mortgage. These calculations are based on a combination of factors such as your current salary and expenses, and of course today’s interest rates. Do not entertain the notion that you can take the maximum mortgage that you can afford and all will be well with the world.
Let me give you a little example. Assume that you take a mortgage of $250000.00 amortized over a 35 year period with a five year fixed interest rate of 3.85%. Your monthly payments not including municipal taxes would be about $1080.00 per month which is pretty much the maximum that you feel you can afford. This is great because you have decided to sacrifice certain things and with a little belt tightening
you will be able to afford your dream home. Let us take a ride on my time machine and zip 5 years into the future. Your mortgage is due and you need to renegotiate a rate for the next few years. Your current mortgage is now at $231,242.72 and your amortization period is down to 30 years but wait, interest rates have gone up to 6.25%. and your monthly payments have ballooned to $1412.00 which is close to $4000.00 more per year, that you have to come up with.
The best advice that I can give you is to purchase a home that will not stress you financially. Use a competent and trustworthy mortgage broker to help you with what may well be the largest purchase of your life. Trust him to let you know what you can afford.