Navigating the Canadian Real Estate Math in Today's Market

Ever-changing market conditions can make purchasing real estate feel like a daunting task, and adding complicated math to the equation certainly doesn’t help. As interest rates increase, you’ll need to work closely with a real estate agent and mortgage broker to help you get a fair deal. You won’t believe how much money you save when you lower your interest rate by a small amount. 

How Much Does Your Interest Rate Affect Home Prices?

Excluding Vancouver and the GTA, Canada’s most pricy markets, the national average home price is $588,500. For simplicity’s sake, let’s say you want to buy a house that costs $600,000, and you have $120,000 for a down payment. If your down payment is under 20% of the purchase price, you will also need mortgage insurance. 

A mortgage term determines your interest rate for a set period. Most Canadian mortgage holders have a short-term mortgage of five years or less. These short-term mortgage rates can be fixed or variable. After the set term, your mortgage contract is renewed until your house is paid off. The time it takes to pay off your mortgage fully is called an amortization period. The most common amortization period in Canada is 25 years.

You’re borrowing $480,000 to purchase your home. How much will interest rates affect the total amount you pay before you own the house? 

5% Interest Rate

So, let’s start with the math for a 5% fixed-rate mortgage with an amortization period of 25 years. In this scenario, you pay $357,511.18 in interest. That’s $837,511.18, plus the $120,000 you used as a down payment. Clearly, it’s important to understand the real estate math before going ahead with a home purchase. 

3% Interest Rate

You’re unlikely to find a fixed rate at 3% in today's market. Variable rates are available in the 3% range, but as the name implies, these rates are subject to change. For the sake of comparison, let’s do the math for a 3% interest rate with a 25-year amortization period. A difference of 2% may not seem like much, but the numbers say otherwise. 

With a 3% interest rate, you spend $201,473.52 in interest. The total purchase, not including your down payment, comes to $681,473.52. Lowering your interest rate by just 2% saves you $156,037.66 over 25 years. Think of all the things you can do with that much money! 

Know What You Can Control

You can control some factors easier than others when you buy a home. For example, you can probably get a lower interest rate by saving for a larger down payment and working to improve your credit rating, but ultimately, your lender will choose the rate. You also don’t have much control over home prices. 

However, you can control how much you pay toward your mortgage each month. The quicker you pay your mortgage, the less interest you’ll have to pay. You could save a lot of money by making a small additional payment each month, but check if your lender has a prepayment penalty before going ahead.