Is now the best time to upgrade your home versus back in January, February, March, and April 2022, when interest rates were low when prices were high, versus today, where interest rates are higher and prices are lower?
Before I dive into it, I want to give you the outcome of what I came up with here. My net analysis shows that if you buy today versus back in January, February, March, and April 2022, you'd be up about $128,000 and $750.
Before I unpack all that, I want to explain the result. That should give you enough incentive to stick around and go over why I got to this number and how I got to it.
These are the critical concerns that most customers have brought to our attention. They're concerned about interest rates continually increasing; their monthly mortgage payment is higher today with higher interest rates than if they would've purchased when interest rates were lower.
The typical questions are, "Should I wait for interest rates to come back down? Our house price will keep falling, so should I wait for my existing home value to increase? Am I better off staying, or should I upgrade now?"
The first question I want to address is, "Are home prices going to continue falling?" That's a good thing to wrap our minds around because that's one of the main things holding people back from jumping into the real estate market or upgrading. Interestingly enough, prices falling impact you only a little bit when upgrading.
This year the market fell almost 24% from April to August, and just from October to December, the market fell 1.96%. From November to December, the average sale price dropped by just $3,000.
I'm not going to get into other market indicators right now, but the list price-to-sale, price ratio, and days on the market are all stabilizing. Days on the market are decreasing, and the list price-to-sale-price proportion is increasing. So it's showing a lot more stability in the marketplace. I don't have a crystal ball, but home prices have stabilized from what I'm looking at here.
So, "Are interest rates continuing to increase?" That's another excellent question, and if you watch my market updates, you can go into a lot more depth into those.
High-level speaking, with inflation coming down and the government potentially easing interest rate hikes, interest rates will no longer likely increase as long as everything starts moving in the right direction. Another indicator is that the five-year bond yields have been dropping. While interest rates are falling, and even right now, I just checked, you can get a mortgage for 4.59%. So it's even lower today than when I did my last check-in.
So yes, mortgage rates are higher, but they are coming down, especially the fixed mortgage rates. You can get a cheaper fixed rate right now than you can get a variable rate. Hopefully, that answers the question, "Is the market still falling, and will interest rates continue to increase?"
So now that we've checked those boxes off, and I hope that eases your mind around those two things, let's take a look at two scenarios pretending that you're buying a home today, upgrading to your next home.
We're going to pretend that you're upgrading to your next home, and I will walk you through two scenarios right now. One strategy would've happened back in March of 2022, and one would happen today.
Scenario number one is buying and selling in March of 2022 when prices were high and interest rates were low, compared to today if you were selling when prices are low and interest rates are higher. So let's take a look at the scenarios and how did I get an extra $128,000 in your pocket?
Okay, let's walk through it. So let's go over March 1st. So if we bought and sold back in March and assume your home is worth $900,000, your home is worth $900, and you have a mortgage of $400,000, the total cost to sell with legal fees, HST and commissions are around $53,000.
So your total cost to sell is $453,110 net in your pocket. So the money you put in your pocket after everything's all said and done is $466,000. With $466,000 to go shopping, you'll buy a home for $1.3 million.
In this scenario, this is your upgrade to your next home. So you're upgrading by 400 grand. From the sale, you're putting every penny you have as much as possible back into the house. You're putting all the money back into the home. So you're going to put 390 grand into the home, which means you have approximately a $910,000 mortgage. You have a 2.5% interest rate because that was the interest rate back in March of 2022 with a five-year term and 30-year amortization. Your monthly payment is $3,608. That's scenario one.
Let's keep going on scenario one. So your one-time cost to buy real estate to buy that $1.3 million home will be approximately $25,300, including your land transfer tax of $22,000, an inspection of five 50 legal fees, title insurance, and HST. So all that adds up to about $25,000.
Scenario number two is now selling in today's market. So that $900,000 home is now 27% less. So you're looking at $657,000 for a sale price, and you have that same mortgage of $400,000. Your total selling cost is $439,381, which is a $13,730 savings. So now you've saved about $13,000 in fees because the home's price was lower than scenario one. I know this net equity number is much lower than the $446,000, but we'll get to that and problem-solve that later. This scenario isn't stacking up to be favorable now, but it will be, trust me.
So you've already saved $13,000 on your cost to sell. How about buying a property? Now we'll take the $217,000 you have and put as much as possible towards the home; that's $949,000. You'll buy this $1.3 million home, which is now worth $949,000 because the market dropped 27%, and you're going to put 21% down, which is about 200 grand.
A total mortgage of $750 at today's interest rate of 4.54%, the same mortgage at five years, a 30-year amortization, and your new mortgage payment is $3,798. Upgrading your home costs you $189 more per month than upgrading back in March. This scenario doesn't seem like it's stacking up in our favor but let's keep going. It's worth it if you stomach an extra $189 a month to upgrade your dream home.
How about a one-time cost to buy? Now that you're buying a home instead of $1.3 million, which is $949,000, you're saving a substantial amount on land transfer tax. Approximately $7,020 is what you'll save on your one-time purchase cost.
Let's go over this why now is the best time to upgrade. So here we go. I'm summarizing one more time here. Here you can see our selling costs and then our net equity. So our savings on selling is $13,729. On the buying side, you started with $446,000, which you bought for $ 1.3 million, and you put a down payment of $390; you had one-time closing costs of $25,300. That leaves about $31,000 left over for you to put in your pocket on your monthly mortgage commitment of $3,600.
On today's side, you had $217,000 selling for after to buy, after you sold, you had a mortgage, and you had a purchase price of $950,000, you put $200 down, you had $18,000 of closing costs, and that leaves you with about $58,000 in net in your pocket after the everything's all said and done with a mortgage payment of $3,798.
As you can see, we saved about $13,800 on the sales side, about $7,000 on the buy side, and then here we have approximately $11,300 in extra mortgage payments over five years; that's 189 times 60 months. When we add this all together, you're up about $10,000 and gained some extra cash in your pocket.
I am going over the cash in your pocket because it will be necessary for the information below. Here is where the game changes. So you started with $500,000 in March, a $900,000 home value, minus your mortgage, which was 500 grand, and today you're starting with $257,000. So $657,000 minus your mortgage is $257,000.
But what about your ending equity? Back in March, you would've bought for $1.3 million, had a mortgage of $910,000, and had cash on hand at $31,000, meaning you had a net equity of $421,599.
Today you would buy a house for $949,000 at the same home, just 27% less. You have a mortgage of $750 cash on hand, $58 total net equity at the end of it all is $200,000.Okay? But now you're like, well, Steve, this doesn't make any sense. I have more money on scenario A than scenario B.
Not so fast, you bought a March in 2022, and we know that the market dropped 27%. So if we equalize that to today's value, you would've lost $351,000 from March to today, and that would've put you in a net equity situation of $70,000 in your pocket versus a $200,000 equity situation today.
So, because you waited and upgraded now versus back then, you lost less money because you didn't buy the higher-value home that dropped in value faster than your lower-priced home. On top of that, you also put an extra $10,000 in savings for fees and land transfer taxes. So you're up $128,000 if we equalize everything to today's value.
On the flip side, if we equalize everything back to March 2022 values, if I bought today in five years, I'm estimating that the market will recover and return to peak pricing. So that's equalized back to peak values. We'll add $351,000 worth of equity to your home, which brings you to $550,000 of net equity versus the $421,000 because, in this scenario, you would've been at $1.3 million if you dropped down to the minus $371,000, which is the $949,000 and you would've swung back up back to the peak. Your net equity would be $421,000. In this scenario, you started at $949,000 and bought low, and then your equity up to the peak, which added $351,000.
So playing this all out, if you decide to upgrade now when interest rates are higher but purchase prices are lower than before, you are doing yourself a huge favor, and there is an excellent opportunity for you.
There's inventory on the market, and there's little competition in the market as well there. The competition's starting to heat up. You can already start seeing some multiple offer situations, but not even close to what we had back in January, February, March, and April, the market has opened up, and you've put yourself in a position where you can add an extra $128,000 in your pocket if you decide to upgrade now.
So to answer the question, "Should I wait for interest rates to come back down?" The answer is no. You want to ensure interest rates come back down because if interest rates come back down, that will increase affordability for more people. When you have more money chasing fewer goods, prices and competition will increase. So if you're trying to avoid competition and maximize that net equity swing, you have to get in before the interest rates go down because the prices will get out of control, and the competition will get out of control. We've already seen that in 2017, end of 2016, at the end of 2021, and at the beginning of 2022.
You don't want to put yourself into that situation if you're going to buy what you want and not fear being homeless if you were to sell your home and couldn't you can't find one or you sell your home and then you have to pay way more than you expected for your next home. This market is much nicer to buyers and sellers than the previous one. So I would not wait for interest rates to come back down.
Let's look at the last question. "Shouldn't I wait for my existing home's value to increase?" If your current home's value grows, the one you will buy will likely increase. As you can see from the scenario that you could put enough money in your pocket today, there's no reason to wait for your home to have more valuable. So just the other home is more valuable. So just for example, if you had a $900,000 house that went up 10% in value, that's $90,000 in value. A $1.3 million goes up 10%; that one's $130,000. You're just now, again, behind 40 grand. So that isn't the right strategy there.
Am I better off waiting to upgrade, or should I do it now? Well, hopefully, the blog answered that for you. If you have any questions, don't hesitate to contact the Zahnd team. You can schedule a call with one of our team, and we'll be excited to get you to that next home!