So, you’re renting an apartment for $1,300 per month. You have a loan in the neighbourhood $10,000 that you need to pay off before even starting to save for a down payment on a condo purchase. It seems that you will not start looking for a place of your own for at least a year or two. Guess what – you could start looking for your own place as early as next week. Let’s see how.
The mortgage industry has changed drastically over the past couple of years. The new mortgage programs allow new and repeating buyers to buy a property with as little as 0% down payment. With extended amortizations available, this would allow you to move into your own property immediately, maintaining the same or similar monthly living expenses.
Let’s see how big of a mortgage you can obtain with a monthly expense of $1,300. If we assume the mortgage rate is $5.25%, $1,300 will be equivalent to a monthly payment on a mortgage of $218,000, based on a 25-year amortization. If you chose the 30-year or 35-year amortization, the $1,300 would be equivalent to monthly payments on mortgages of $236,000 and $251,000, respectively. True, you would still have to pay condo fees and property taxes in addition to your mortgage payment. While you cannot do much about taxes, a big portion of your condo fees goes towards expenses that you may already be paying in addition to your rent, such as heating, water, etc.
Even if you wanted your monthly mortgage payments not to exceed $1,000, this would qualify you for a mortgage of $167,000 based on a 25-year amortization, $182,000 based on a 30-year amortization, and $193,000 based on a 35-year amortization.
While you might be skeptical about buying a property with no down payment, in many cases it makes perfect sense to do it so. The major difference between having a 5% and a 0% down payment lies in the insurance premium that has to be paid on your mortgage. With a 5% down payment, the insurance premium on your mortgage would be 2.75% and with 0% it would be 3.1%. Based on a $200,000 mortgage, this difference would account to only $700 one-time fee that would be added on top of your mortgage.
Let’s assume for a minute that you have a 5% down payment of $10,000. Let’s also assume that you have credit cards debt equivalent to $10,000 on which you are paying 19%. Based on this information, it only makes sense for you to use the $10,000 to pay out your credit cards, and obtain a 0% down payment mortgage. This will enable you to consolidate your $10,000 debt into the new mortgage at the rate of 5.25% rather than continue paying a high interest rate of 19% on it.
By buying your property sooner rather than later you could also benefit from the annual appreciation in the value of your property. If you take a conservative expected growth of 3% annually, your $200,000 property would grow in value $6,000, each year. Furthermore, by re-directing your rent payments to your mortgage payments, you would also be paying down a portion of your mortgage principal every year, which is not the case with your rent payments.
Although everyone’s situation is unique and should be analyzed on an individual basis, it is important for you to know that there are mortgage options that can help you move into your own place sooner than you would have thought.
You should check with your bank or your mortgage broker about various options, scenarios and conditions that apply to each of these programs. You could be an owner, rather than a tenant.