Buying - As the market flexes

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Looking closer at the "purchase investment formula".

Thinking of using low interest rates to purchase? Mortgages are a two part formula...the rate...and the factor of time. And the factor of time is hinged on the expectation of future conditions...or "speculation".


Let’s run this model....

$310,000 purchase with 5% down ($15,500) = $294,500.

Your $310,000 purchase also includes closing costs expenses. With 5% down your CMHC fees are likely to be about $8,000. (If you’re like most you’ll attach this to your mortgage). $294,500 + $8,000 = $302,500 mortgage.

Land transfer tax and closing costs account for a sizable and unrecoverable expense. First time buyers would be looking at an amount no less than $3,500 in this example. Minimum upfront cost, down payment + closing costs: $19,000

Your $302,500 mortgage @ 4% with a 5 year term = $1,591.21 per month. Balance at the end of the 5 year term $263,338.

Paying down $39,162 of your financed principal seems like you are ahead in the equity game...but let’s not forget that time is a factor in this mortgage formula.

Let’s input what the refinancing would look like if the rates were to change, being reasonable of course, using inflationary figure experienced in the past.

Refinancing the balance of $263,338 with a new 5 year term @ 6% = $ 1,684.85 per month...and at 7% = $1,844.46...and at 8% = $2,009.83


What about falling values?

As rates go up values go down. (Buying power is weakened). Picking through the analogues of the cities (Toronto’s) past reveals definitive examples.




Example #1
2 bedroom + den condo. North York.

xx yonge st. unit #101 List Price: $227,900 Sold Price: $212,500 89.3% of list. SOLD 11/27/1989

xx yonge st. unit #101 List Price: $168,800 Sold Price: $163,500 96.8% of list. SOLD 06/27/1997

xx yonge st. unit #101 List Price: $214,900 Sold Price: $204,000 94.9% of list. SOLD 11/27/1989

xx yonge st. unit #101 List Price: $239,000 Sold Price: $235,000 98.3% of list. SOLD 09/01/2007


In the example above we see that between 1989 and 1997 (through an eight year period) the subject lost 26% of its value. Now the interesting part of this observation is that if you go back through the pages of history, and study the sales of homes and condos throughout the GTA, you will find this pattern of value depreciation repeating, in a more or less similarly remedial measure at this time. Like a distinct "ring of deflation".

Now, going back to the $310,000 purchase. Just to entertain the idea of value depreciation, let’s assume that the depreciation is 15% of its purchase price by the end of the 5 year term. That amounts to a “market value” of $263,500 (or a depreciation of $46,500).

If mortgage rates proved unaffordable to refinance, selling at $263,500 would cost $13,175 + GST (or HST) in commission + mortgage discharge penalties.

The key here is NOT to purchase at the TOP END of your affordability/qualification.

Stay tuned for the next BLOG subject. I’ll be dissecting current conditions and weighing them against past.