Everyone wants to get the best mortgage financing offer. Does that mean getting the lowest rate, the longest term or the smallest payment? The best strategy for one person isn’t necessarily right for another.
Mortgage renewal is the perfect time to reorganize your finances based on your life goals. Your plan will be different, depending on whether you want to pay the lowest interest possible, reduce your monthly payment, save for a special project or optimize your debt repayment.
Here are 3 things to consider before settling on a mortgage agreement that’s right for you.
Your financial commitments
To find out how much flexibility you have with your budget, calculate the monthly payments for your:
Credit cards and lines of credit (monthly minimums)
Personal loans (e.g., student loan)
Other payments, like child support
Note: no more than 40% of your gross household income should go to all of your financial commitments, including your mortgage payment and other home-related expenses (e.g., property taxes, school taxes, energy costs).
Buying a home is likely the biggest purchase you’ll ever make.
But before you can pack up and move in, you’ll need to secure a mortgage. This is often a long-term commitment. The average Canadian expects to pay off their mortgage by age 591, so it’s important to do your research and choose the option that’s best suited to you.
Basically, when it comes to the mortgage interest rate you’ll pay, you have.
Fixed-rate mortgages are predictable.
With a fixed-rate mortgage, the mortgage rate and payment you make each month (or whichever frequency you choose to pay) will stay constant for the term of your mortgage.
This means you’ll know exactly how much principal (the initial amount borrowed) and interest (the amount paid on the amount you borrowed) you’ll be paying on each scheduled mortgage payment throughout the term you select.
The downside? You won’t be able to tap into a lower interest rate — ensuring more of your payments go towards the principal and less to interest — if interest rates drop during the term of your mortgage.
What a fixed-rate mortgage offers:
Your “set it and forget it” choice
Doesn’t change if the bank’s prime lending rate goes up or down
Eases budgeting anxiety and increases predictability
You may pay a premium for the stability
You may miss out on potential interest rate drops
Tip: Interest rates vary widely depending on the term you choose. For example, the interest rate on a 10-year fixed-rate mortgage could be almost twice as much as the interest rate on a typical 3-year fixed rate mortgage.
Variable-rate mortgages will fluctuate.
With a variable-rate mortgage, the mortgage rate will change with the bank’s prime lending rate. In this case, your scheduled payments will remain the same, but the amount paid towards your principal will vary.
Cautious buyers often choose a fixed mortgage because it means they can budget for the length of their mortgage term without any surprises. Variable rates are more unpredictable, but could work to your advantage if you can handle a bit of risk and uncertainty.
What a variable-rate mortgage offers:
Your “let’s see what happens” choice
Costs will be less if interest rates drop
Offers the possibility to lock in a better rate down the road
Works against you if interest rates rise
May increase your financial uncertainty 05
Tip: If you’re the type of person that always buys the extended warranty, then a variable rate mortgage is probably not for you.
What’s more common in Canada?
Fixed-rate mortgages are more popular, but there has been a slight movement towards variable-rate mortgages in 2016. The accompanying chart, from the BMO Psychology of Home-Buying Report, gives you a sense of change over time.
Note: The percentage for variable rate mortgages in 2016 is a bit higher in more expensive markets. For example, 29 per cent of Toronto homeowners and 37 per cent of Vancouver homeowners say they’ve chosen a variable-rate mortgage. How to choose what’s right for you
How do you feel about risk? A fixed-rate mortgage means the lender takes the risk; a variable-rate mortgage means you do. While the interest rate may be higher on a fixed-rate mortgage, it will stay constant during your term so you can budget accordingly.
How do you feel about the current market? The difference between fixed and variable rates has narrowed considerably in the last few years, making fixed-rate mortgages more appealing. Interest rates have been at historical lows, and while opinions vary, few believe interest rates won’t rise over time — the question is more likely when.
Tip: It’s really difficult to successfully time interest rates. Going variable to save money in the short run — hoping to lock in a fixed rate “at the right time” — is really tough to do.
And what if interest rates rise? No matter which route you take, it’s crucial that you evaluate the impact of an increasing interest rate on your mortgage costs — a stress test, if you will. For example, if interest rates go up by two per cent, would you still be able to afford your monthly payment? It’s important to plan for the unexpected — you can start by building an emergency fund.
According to our research1, not everyone prepares for a rise in interest rates. In fact, themain reason home-buyers offer for not considering a rise in interest rates is that they simply didn’t think of it (45 per cent) or didn’t realize it was something they should be doing (27 per cent). You can do better by preparing for multiple scenarios.
The next step BMO mortgage specialists are here to work with you to help you make the right decision based on your needs and your lifestyle.
In good years and bad, property is a safe investment. It is, however, an area where it’s better to think long term than to try to turn a quick profit by betting on speculation. Here’s an overview of real estate trends, to help you better understand the opportunities available.
The real estate market is influenced by many factors. The strength of the economy, the unemployment rate, demographics and consumer confidence are just some of the elements that impact this sector, both for new builds and resale. Should this lead us to believe that real estate is an unstable market? On the contrary. Over the long term we see clear growth, slow but constant. That’s why real estate is considered to be a safe investment, as long as you give it the time to do its work. Nevertheless, it’s important to remember a few basic rules, and to understand how market growth works.
Although yearly statistics and projections are good indicators, Samir Bachir, broker, speaker, real estate coach and president of OSE Real Estate Coaching, recommends having a long term vision. “When you look at statistics from the last 15 years, you can see that overall, sales as well as supply and demand stay constant over time,” he says.
In other words, buying property is an excellent investment. But don’t forget that it’s the passing of time that brings the value up, through inflation. “You also need to keep in mind that several factors can have a major influence on that value, in particular location, and the demand for a certain type of property,” specifies Bachir. So, if you’ve targeted the right market – for example a neighbourhood with a high potential for growth given its growing popularity – and the right type of product, you’ve got a recipe for a strong return. Continue reading →
Everyone wants a place to call home. If you’re ready to take the plunge into home ownership, you may come across a new vocabulary and terms you haven’t heard before. Are you sure you know what they all mean?
Take our 10-question quiz to test your mortgage-term savvy and learn a few things along the way. Continue reading →
Thinking of buying your first home but worried about making such a big commitment? We address 3 concerns shared by first-time buyers.
Young people can’t afford to buy a house anymore.
When the Government of Canada tightened mortgage requirements last fall, it was all over the news. House prices have evened out a little; as for condos, it’s still very much a buyer’s market. And that’s good news for first-time buyers!
Here are some tips to be able to afford your first home:
Get started early
Save for a down payment
Consider your financial commitments
Set aside 3% of the value of your house for start-up costs