Sometimes we forget how low today’s mortgage rates are, historically speaking.
Back in 1981, when rates exceeded 21%, a $200,000 25-year mortgage cost more to carry than a $500,000 mortgage today!
Since 1970, 5-year mortgage rates have peaked each year at an average of 10.95%. (Click image to enlarge)
Data Sources: CMHC, MyVirtualMortgageBroker.com
It’s also interesting that you should use the 200K to 500K example as the purchasing power of the money hasn’t changed much in those two numbers.
Consider inflation at about 3.5% from 1981 to 2007, that 200K mortgage would have been on about a 265K house. That same 265K at 3.5% over the course of the years from 1981 to 2007 at 3.5% would be worth around 648K. If you put down 20% now you have near a 500K mortgage. That puts carrying the same house is the same relative cost now and in 1981.
Lets look how the bank made out on this deal. Say the original person got their house in the peak of 1981 over 25 years in 5 year terms. He put 65K down (or around there) to get a 200K mortgage. He would pay a payment of $3490.89 for the first term, leaving 197916.01. Then he would have moved to 11% in ’86 for the next 5 years of payments at 2010.11, leaving 179262.30. Next 2,063.88 at 11.5%, leaving 148399.16. Now on to 1786.52 for another 5 years leaving 88480.83. Then 1772.23 for the last 5 at 7.5% leaving nothing left…. ‘FINALLY!’ he thinks.
So this person paid:
3490.89 * 60 = 209453.40
2010.11 * 60 = 120606.60
2063.88 * 60 = 123832.80
1786.52 * 60 = 107191.20
1772.23 * 60 = 106333.80
Add those all up and he’s put in 667417.80. Now he can sell his property if it appreciated at 3.5% per year for 648K making a grand profit of NEGATIVE 19000!
That doesn’t even include the maintenance, the new roof you need in 25 years, the new furnace, the decorating, the big deck, the insurance, and the property tax.
Wow, I now know why people say real estate isn’t a good investment. It’s a place to live.
Now granted, if you picked the right spot at the right time you home will appreciate faster than inflation, but that’s a gamble and not an investment.
It’s very interesting to sit down and look over the numbers however.
On an unrelated to my previous post note . . .
It’s interesting to see the average of the peaks is 10.95%, the average of the totals is around 10.35% and the average of the Januaries is 10.16% [Augusts are 10.52%].
I wonder if we should be looking at these numbers and thinking that locking in for long periods when the rates are below historical averages is a good idea. I wonder if the economy is on a good enough upswing to cause interest rate rises like we saw in the 70’s and 80’s.
Hi Traciatim, Very interesting analysis. Funny enough, even though we’re in the mortgage business, in many cases we agree with you that renting is the better way to go–especially in inflated markets like Vancouver. Thanks again for the posts.
So Traciatim’s calculations indicated above means the homeowner spent $280/month for 25 years (65k down + loss of 19K) – that’s still a whole lot cheaper than renting