So, as you might know, we live in Canada in the Great White North. That means purchasing a house is actually quite a reasonable and financially prudent option. You see, the cost of renting here is very, very high – we are talking between $1,100 – $1,500 for a 1 to 3 bedroom suite (or duplex on the upper end).
On the other hand, houses are currently selling at between $200,000 (for a townhouse with 3 bedrooms and about 1,600 sq ft) to $400,000 for a 5 bedroom bungalow.
If you do the maths, a $350 – 400k house works out to be only $1,400 – $1,800 in mortgage payments. With property taxes and other insurance and other home-ownership costs, you are for the most part saving money when you do purchase a house.
Why? Well, the Bank of Canada’s extremely generous 2.95% or so Prime rate is the main cause of this. It’s incredibly cheap to buy.
Of course, there are a few major dangers:
– Catching a falling knife
Housing prices dropped last year. It dropped the year before too up here. So there’s no reason why housing prices shouldn’t drop again this year, especially in light of the drop in the resource sector and gold prices. Whatever you buy is likely to be cheaper to purchase in a year or two if you can wait that long (an equivalent place that is).
– Higher interest rates
The other major danger is that interest rates could rise, significantly. The historic interest rate was significantly higher than what it was now. Even if interest rates go up marginally, to say 5%, this could easily cause major problems in terms of the mortgage payment.
So why do we do it? Because for us, right now, it makes sense.