- Mortgage is amortized over 30 years. Why 30? Because I think its probably the median of what is being sold to many people these days.
- SFH price will be $500K, simply because it is an easy number and just about the median price of SFHs here now.
- Family income is $72K. This isn't the average, nor the median, but it is near both. It's an easy number to break down into monthly terms for this exercise.
- Down payment will be 10%. I have no idea how to find out what the average down payment is these days, but I'm guessing this may be close.
House purchased at $500K using interest rate posted by Big 5 bank, I've assumed a negotiated discount from 5.85% to 5.25%.
Those are big numbers. Our pre-tax income is $6000/month. If we pay bi-weekly, we are using 38% of our pre-tax income to service our mortgage debt. Let's factor in other housing-related costs of $2200 in property tax. I'm using this number because it is the actual, after-grant charge of a friend of mine who lives in Saanich and owns a home that fits these assumptions, anecdotal I know. We'll use the widely-accepted 1% maintenance theory, which equals $5000/year. So in addition to our $2280/month we have $420/month in maintenance and $185 in taxes for $2885 or 48% of our pre-tax income going to our monthly housing ownership costs.
Scenario Two: Five years down the road
We need to renew our mortgage. Interest rates are back closer to their historical norm of 7.5%. Let's see what's happened:
First off, we've built up some equity. About $35K of the approximately $150K we've given the bank so far has gone to principle. But, the interest rate has gone up and now we have to pay more to stay in the same place. Our incomes went up, with inflation, so our $6K/month is now $6500/month. Again we'll pay bi-weekly. $2800 to the bank. We'll assume that taxes stayed the same as did maintenance, so our costs are $3400/month. What's that in percentage: 52%. Surprisingly, that's only a 4% increase in costs, despite a 2.25% jump in interest rate.
What's the point of all this? Merely just messing with some numbers arbitrarily. Is it likely that these scenarios will take place? Who knows. But it makes me wonder if interest rate hikes really matter all that much? Over to you.