Choosing the right kind of mortgage depends on a number of variables, including economic outlook, the housing market and interest rates. First it's important to understand your options:
What is a fixed-rate mortgage? The interest rate on a fixed-rate mortgage is locked in for a predetermined time depending on the term of your mortgage - usually three to five years, but it can be six months to 25 years. Fixed-rate mortgages offer the security of knowing what you will be paying for the term selected. They're often considered a safe bet for those who don't want to worry about fluctuating rates.
What is a variable-rate mortgage? A mortgage in which payments are tied to the bank or lender's prime rates, which can fluctuate several times a year. If interest rates go down, more of your payment goes towards reducing the principal; if rates go up, a larger portion of your monthly payment goes towards covering the interest.
What is a hybrid mortgage? A mortgage that offers a combination of fixed and variable. You can lock in part of your mortgage at the (usually higher) fixed rate and the rest at the (usually lower) variable rate. If prime rates were to rise, the fixed portion of your mortgage would insulate you from the impact and when it goes down, gains made on the variable side would offset the higher costs of the fixed portion of your mortgage.
Studies show that homeowners can generally save over the long term with a variable rather than fixed mortgage. However, it depends on market conditions and of late, many experts believe that fixed mortgages are, in fact, the way to go. You want the advice of an expert who knows the industry and knows how to read economic cues. Our Mortgage Brokers can help.
How Are Mortgage Rates Set?
Economics 101: The Bank of Canada sets what is known as the target overnight rate. This overnight rate doubles as the interest rate chartered banks are charged to borrow money. In turn, banks use the overnight rate to set their prime lending rate - the rate they offer their best customers. When the Bank of Canada changes its overnight rate (they revisit it about eight times a year) it signals to the banks that it wants them to adjust their prime lending rates. Variable mortgage rates and lines of credit move in conjunction with the prime lending rate.
Fixed-rate mortgages are a little different. Banks use Government of Canada bonds to raise money for fixed-rate mortgages. In the bond market, interest rates fluctuate more often because they're subject to the changing moods of traders and bond investors. These people are constantly trying to figure out how fast the economy will grow and where inflation is headed. Tip: Watch the bond market for clues on where fixed mortgage rates will go next.
The Hidden Cost of Rock Bottom Rates
If every storm cloud has a silver lining, then here's one for homebuyers: The economy is shaky, but mortgage rates are great.There's never been a less expensive time to borrow money, but did you know that securing the best mortgage is not always about the lowest rate? That's why it pays to talk to an experienced Mortgage Broker - they know that homebuyers can lose out when they fixate on rates.
Truth is, almost all rates are very good right now, but it's important to keep in mind that low rates are only one component of paying less interest on your mortgage over the long term. You also want to consider whether a mortgage has good payment flexibility, pre-payment privileges, portability, assumability and a re-advanceable option so you can tap into your equity later on. Other important mortgage options include home warranty programs, good conversion rates, favourable interest compounding, and self-employed programs.
If you don't work with a Mortgage Broker, you may also find it frustrating when a lender's advertised rate doesn't actually apply to you. The lowest rates may only be for situations like jumbo mortgages, or for a mortgage that will close in the next few weeks. Or, you may find that the advertised low-rate mortgage could be for a no-frills product.
A good Mortgage Broker will only quote rates that apply specifically to your needs and circumstances by first asking relevant questions, and then quoting you the best rate for your situation. Your Mortgage Broker will also provide continuous mortgage advice and keep you up-to-date should a better mortgage opportunity emerge in the mid-term.
Ongoing advice is critical. When you get your mortgage from a bank, they are happy to give you the money, but often you're left on your own until the mortgage matures.
When the economy is unpredictable, you want expert advice from someone who is looking out for your best interests so you can act quickly should opportunities arise.
Mortgage Brokers are always working for you:
- They know what lenders are looking for, and can help you structure your application to maximize your chances for approval at the best possible rate.
- They provide valuable advice on paying your mortgage down quickly and avoiding fees.
- If you have other debts or credit issues, they offer advice on how to improve your rating quickly.
- They are rate specialists with access to more 50 lenders and rates that rarely get posted. They know every day what rate specials are being offered in the market.
Your mortgage is an enormous financial and emotional investment. In an uncertain economic climate, you want expert advice from someone who knows a good mortgage is about more than a rock-bottom rate. For more information on mortgage products and your options feel welcome to call us at 416-901-8777 or email us at firstname.lastname@example.org.