With a current range of approximately 2.5 percent to about four percent, mortgage rates for residential real estate are still at or near historic lows across Canada.
“Hmm” you think, “maybe it’s time to purchase my first home or trade up to a larger home.” Those can be big steps with long term financial implications, and you could end up paying a lot more for that new home than you bargained for by making a less than optimal mortgage choice.
So, let’s get you going in the right, and most cost-effective, direction with this basic mortgage info:
What’s best — a fixed rate or a variable mortgage? There is no single right answer to this question. The question you have to answer is, “Which option is most suited to my needs?”
• Fixed rate mortgages offer the security of a locked-in interest rate for the term you choose, typically five years. They provide peace of mind and predictable budget management because you know exactly what your mortgage payment will be for the length of the term. Approximately 66 percent of Canadians have chosen fixed rate mortgages.
• Variable rate mortgages are usually available at a lower interest rate than fixed rate mortgages, at least initially, but the interest rate is linked to the Bank of Canada’s Prime Rate and fluctuates with it. That could mean decreases or increases in the rate you pay over the term you select and a corresponding impact on both total interest costs and the amount of your mortgage payment.
Among other considerations, your choice should depend on your tolerance for risk and a survey of options beyond conventional mortgages including:
• Blended rate mortgages which offer a combination of both fixed and variable rate financing, a split rate structure that combines the benefits and risks of each type of mortgage.
• Mortgage pre-approval is often encouraged by real estate agents because having your mortgage financing firmly in place indicates to prospective sellers that you are a serious buyer.
Be aware that the mortgage lender will probably pre-approve you for the largest possible mortgage amount and when you’re shopping for a home, you may get caught in the trap of stretching your finances to the maximum and putting your family’s finances at risk if your circumstances change or there is a significant interest rate increase at renewal time.
Don’t over-mortgage your future. Talk to your professional planner about the best choice for you based on your personal financial objectives and your overall financial plan.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.
