Most people need to get a mortgage (i.e., a loan) to buy a property. After all, investing in real estate is a humongous investment.
In the scenario of buying your first home, the good thing is that once your mortgage gets approved and all the papers are signed, you can start living in the home while paying off the mortgage every month.
Have you thought about how much you’re really paying for your property?
There are a number of factors that affect how much, in total, you’re paying for your property. Here, we’ll focus on the total you’re paying your lender over the course of paying back the mortgage in its entirety (also called the mortgage amortization period).
What affects how much you’re paying in total for your property?
On top of the price you paid for your property, you need to pay back the mortgage with interests. Here are factors that affect ultimately how much you’re really paying for your property. We’ll follow with an example later.
- Interest rate: the higher the interest rate, the more interests you’ll be paying your lender.
- The amortization period: the longer the amortization period, the more interests you’ll pay.
- If you need to get mortgage insurance, that will add to the cost as well.
Notably, the interest rate you pay for your mortgage changes. For example, it may take 25 years for you to pay off your mortgage, but mortgages tend to be shorter. The most common is a 5-year mortgage. You can also choose between fixed rate or variable rate.
Typically, variable rate results in lower effective interests. However, some people like the predictability of fixed rate. At the end of the 5-year period, you’ll refinance your mortgage at a new interest rate.
Currently, in Canada, if your down payment is less than 20% of the home’s price, you must get mortgage insurance. If your down payment is 8% for a $500,000 condo, you’ll need to pay an extra 4% for the mortgage insurance.
Mortgage Example: How Much is Your Mortgage?
|Property Price: $500,000|
Down Payment: $40,000 (i.e. 0.08 x $500,000)
Mortgage: $460,000 (i.e. $500,000 – $40,000)
Mortgage Insurance: $18,400 (i.e. 0.04 x $460,000)
|New Mortgage Amount: $478,400 (i.e. $460,000 + $18,400)|
Now, you need to pay off a mortgage amount of $478,400 to your lender.
How much are you really paying for your property?
You want to hunt for the lowest rate available (so that you pay lower interests). Let’s say the lowest 5-year fixed mortgage rate is 3.34% in your area.
To simplify, let’s assume the rate stays the same until you pay off the mortgage in 25 years. You’ll be making monthly payments of about $2,354 to your lender. In total, you’ll pay $706,239 to your lender, including $227,839 of interests. In other words, you really paid $706,239 for your property.
Moreover, you’ll be responsible for paying property taxes every year for being a property owner. In Canada, the property tax is proportional to the assessed value of your property, which changes every year.
If you’re getting a condo, you’ll also need to pay strata fees every month.
What if you had a lower interest rate?
Let’s say you were very lucky and found a lower interest rate of 3.13% instead.
Let’s assume again that the rate stays the same until you pay off the mortgage in 25 years. You’ll be making monthly payments of about $2,301 to your lender.
So, you’ll save $53 per month (or $636 per year) compared to the previous example. In total, you’ll pay $690,333 for your property, including $211,933 of interests.
Thanks to the 0.21% reduction in the interest rate, you’ll save $15,906 over the course of 25 years.
If you’re buying a property for your first home, it’s not an ordinary investment because you’ll live in it. If you’re not living in your own home, you’re renting. So, there’s always an ongoing cost of living under a roof. Once you pay off your mortgage, you only have to worry about property taxes and maintenance of the home.
For successful stock investing, you might aim to maximize returns (or income) with the least amount of risk.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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