With the current housing market falling, and mortgage rates coming down is it a good time to plan a condo purchase in downtown Toronto in the next 6 months? That’s what I have been asking myself lately.

 

As we are getting closer to our wedding date we are starting to look at our options for accommodations. The first option is to rent and save aggressively for a down payment for a condominium, however given the current mortgage rates purchasing a condo seems like a good deal. We are thinking towards purchasing condominium as a primary resident, which we will eventually turn into an investment property and rent out.

The rental cost in Toronto currently is about $1000/month for a small 1 bedroom in the outskirts of Toronto and over $1200 in downtown Toronto which is our preferred location. Thicken My Wallet recently wrote about the market becoming a renters ‘ market.

With current mortgage rates at 4.49% we could purchase a condominium in downtown Toronto and have a slightly higher monthly cost ($1300-1500) but would be building equity in the mean time. So we have been trying to put together a plan that could provide us with shelter as well as potential to increase our cash flow in the future.

The Plan

It is a twofold plan: 1.Purchase a condo in downtown Toronto probably on a 30-35 year amortization and have it CMHC insured, use it as primary resident for the next 5-8 years at which point (part 2) we will turn it into a rental property and generate income from the investment property. Although, I am not a big fan of long amortizations, due to the much higher overall interest cost, but it is the second part of the plan that is making the longer amortization the better option.

The longer your amortization the lower your monthly payments but higher your overall interest costs. If I want to use the property as an investment and generate income from it, it will be very hard to rent it out for a profit with 25 year amortization, and since it is used as an investment to generate an income it wouldn’t really matter if my overall interest rate is higher, because the interest cost will be considered business expense and will be tax deductible (along with some other costs associated with it).

The (hopeful) net result: Place to call home and eventually increase cash flow.

Now I am not talking about buying something next month, but towards June or July. The reason is that I am expecting mortgage rates and condo prices to decline further over the next several months which would reduce my costs and give me more time to save for a larger down payment.

Our other option is to simply just rent and continue saving/investing over the next few years for a down payment.

What do you think of the plan? Are you planning on taking advantage of the falling housing market and mortgage rates?