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Fri, May 6th, 2011, 11:25 AM #16
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Fri, May 6th, 2011, 08:53 PM #17
As long as you are not mortgage-free, the home technically belongs to the lender. In order for you to build equity, the property must appreciate in value every year. If the home doesn't appreciate in value, the cost of borrowing erodes the principal you paid off. The situation becomes worse when housing values decline because now you're paying interest on a depreciating asset.
If you calculate the cumulative interest charges on a typical property in the GTA ($350,000 price, awfully cheap but just for argument's sake), the average consumer pays, based on 25 years amortization, hundreds of thousands in interest by the time the home is paid off. Also note that when housing prices appreciate, property taxes also rise to keep the market balanced. You should also factor into account that most utility bills tend to increase every year. The belief that owning a property means tax-free appreciation is somewhat misleading.
So while the property may have appreciated by 2% to 3% per year during the time of ownership, how much money have you lost, taking compound interest into consideration, over all these years paying interest which doesn't build up equity at all?
That's why I tell clients whenever we meet that if they want to save themselves some money, pay off the mortgage aggressively at the beginning of the term when the allocation to interest is greater. The problem is very few people actually do it.
I really hope that people who are consider home ownership won't be fooled by the ridiculous rate of appreciation that we have seen over the past 7 or 8 years. Such rate of appreciation is abnormal and eventually there will be a major correction. Those who purchased at the peak will pay a steep price.Last edited by lior; Fri, May 6th, 2011 at 08:55 PM.
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