In the mortgage broker business world, we read a lot about future changes from the Bank of Canada regarding tightening lending rules, interest rates and our country’s debt load.
It’s the burgeoning debt loads that individual Canadians carry that is the reason behind tighter lending rules.
As for interest rates, our main concern, as mortgage professionals, is to guide our clients through the pros and cons of mortgage interest rates.
One of the major dilemmas that faces first-time buyers, anyone upgrading to a larger home, facing future mortgage rate renewals or looking to renovate their homes by increasing their mortgage is determining what interest rate is best applicable for a given financial situation.
There are varying types of mortgage interest rates to choose from out there in financial land.
There are variable rates, those with no set interest rate for a specific period of time; closed mortgage rates, guaranteed interest rates for set period of time; open mortgages, with either variable interest rates or fixed rates from six months to one year; and line of credit, open revolving credit up to 65 per cent of the value of your home.
In recent years, the borrower’s preferred choice has tended to be variable rates. However, due to recent rise in interest rate, the spread between variable interest rates (prime plus or minus the financial institution’s prime rate of 3%) and closed fixed rates may be about 60 to 80 basis points.
For example, a variable rate mortgage can be as low as the prime interest rate of 2.60% and a five-year as low as 3.49% (an average rate based on different institutions’ rates). You can also acquire 10 year closed mortgage rates in the 3.99% area but some feel that may be high compared to the variable rate mortgage.
As with investments, we have to rate the risk to reward in choosing a mortgage interest rate.
From what we read and our experience in mortgage lending, interest rates will eventually rise.
So if you are in a closed variable rate or credit line (both on fluctuating interest rates based on financial institutions’ prime rates), you will have to carefully watch that prime rate.
Each individual lending situation carries its own characteristics, so each application a mortgage professional takes has to be viewed with the borrower’s best interests in mind.
For example:
•What are your financial risks to interest rate fluctuations?
• What are your plans for the future—could you be inheriting money, planning to move in the near future?
There are many other scenarios that we have not discussed here but, should you have any questions regarding your future renewal, home purchase, renovation, investment or refinancing, please call us and we will gladly sit down with you to discuss your options.
Remember, you do not pay us, the financial institution does plus we do only one credit check which will keep your credit score in line.
