permabear Posted July 13, 2016 Share Posted July 13, 2016 I had this conversation the other day with a friend. He was saying he should get into the housing market (Toronto, Canada) because interest rates are so low, and now is the time to do it! I was arguing that because interest rates are low, people are being encouraged to enter the RE market and prices have been pushed up. He responded: if interest rates go up, prices will drop, but from a monthly payment standpoint, it may work out to the same. This got me thinking... These scenarios work out to exactly the same annual payments and the sum of interest and principal repaid over the term (5 year term, paid annually) are equal. Which one would you pick (or are you indifferent) and why? Note: this is a hypothetical situation on the same property Scenario 1 (Most expensive RE, Cheapest debt) - $500,000 mortgage, 5% interest rate, annual payment: $115,487, total interest paid over term: $77,437 Scenario 2 (Cheaper RE, More expensive debt) - $437,788 mortgage, 10% interest rate, annual payment: $115,487, total interest paid over term: $139,649 Scenario 3 (Cheapest RE, Most expensive debt) - $387,132 mortgage, 15% interest rate, annual payment: $115,487, total interest paid over term: $190,305 I think my answer is, I would be indifferent. The real question for me would be, what is the discrepancy between cap rates and interest rates in any given scenario. Link to comment Share on other sites More sharing options...
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!Register a new account
Already have an account? Sign in here.Sign In Now