Today’s rates are at a historical low. This is a major factor in housing affordability and the positive stats that we’re seeing lately reflect this. Over the past two-odd years, we’ve been in a wonderful ‘bubble’ where mortgage rates and interest rates as a whole have been rock-bottom low. Heck – I’m such a mortgage geek that I have a statement on my office wall that reminds me that I’m paying P-0.80% (currently 1.45%) for the mortgage on my rental property. We can’t get variable rates like that at this point in time, but we have seen a transition from Prime-plus rates to rates at Prime in the past few weeks. Stay tuned for more as the action unfolds on that!

The thing about being at rock bottom is that there’s nowhere else to go but up. Dusting off the doorknob to the ‘economics’ door in my brain reminds me that standard theory tells us that rates are lowered to stimulate the economy; as the economy recovers, rates will rebound back to “normal”.

So... Where is normal?

Two to three years ago, 5-year mortgage rates were in the 6.00-6.50% range (both fixed and tied-to-prime variables/ARMs). That’s a pretty far stretch from today’s 4.09% and P-0.05%. Those figures of yesteryear are far more ‘normal’ in terms of where mortgage rate normally hover.

What does this all mean?

Looking at an article in the Calgary Herald this morning, an economist from Montreal sheds some light on where we’re likely headed in the next few years rate-wise.

Maybe something did sink in through all of those ECON lectures at the U of Calgary after all!

Overall, it makes sense for the more risk-averse and rate-sensitive homeowners and homebuyers to look towards locking down their rates now while they’re at their lowest.

This all makes good sense when you look at the “big picture”, but is RATE the ONLY thing that mortgage borrowers should look at?

I’ll take the high road and say no, with an asterisk (*).

*Rate is definitely important.

It’s noble (and just good financial sense) to stand up against inflationary pressures, fight for the peace of mind knowing that you’ve gotten the best rate possible for your unique situation, and combat the evils of compounding interest.

But it’s not the ONLY thing that should be of interest to those of us that need mortgages to purchase and own our homes.
… so what else is there?

Flexibility. Choice. Better control of your finances.

How so?

About half a year ago, some Canadian Mortgage lenders released a new product: a “no frills” mortgage product. Initially, it gave borrowers a solid discount off of the going fixed rates at the time. The trade off? At its inception, the product did not allow for portability. “Nada” to lump-sum payouts too. A payment structure other than ‘monthly’? Zilch. Where did this product go? The ‘invisible hand’ of the market cast its vote and the product disappeared into obscurity through the product’s limited success for numerous reasons. (Sidebar: it was a great product for a specific client base. I personally applaud the marketing team that dreamt up the product; I’d more blame its demise on the volatile market more so than try to point fingers at a faulty design. )

Translation?

Excellent rates should be a motivator to help guide your decisions, but shouldn't necessarily be the only deciding point. As exhibited through the relatively short half-life of the above ‘no frills’ product, Canadian mortgage consumers want more than just a great rate.

Some other items that you should grill your mortgage professional about:
Do you want to pay your mortgage on a monthly, semi-monthly, bi-weekly accelerated or weekly basis? Many lenders offer this ability, but some don’t.

If you are purchasing a new home, when is the possession date? Sporadically throughout the year, lenders compete for new business by offering market-beating rates for a specific term (3 years, 5 years, etc) BUT the transaction has to close in a short period of time. This may not be enough for some homebuyers, especially those concerned about rushing and making a poor decision on a home just because they wanted to ensure that they get the best rate available. This scenario can also be brought up in selling and refinancing discussions as well.

Breaking penalties? What are those? If, for whatever reason, you decide to break the term of your mortgage part-way through, you could be on the hook for a sizeable penalty. Especially with today’s rates, this has been a common conversation with clients seeking a more affordable lifestyle. Many of the refinancing discussions have ground to a halt when they find out that the payout penalty on their current higher-rate term floats in the $20,000-50,000 range. Pump the brakes! If this is important to you, let your mortgage specialist know and we can help you navigate the maze some more.

Prepayment options are another point of contention with many clients. For some, this is the absolute end-all point of contention, even more important than rate; this could be a deal-breaker for those of us that are extremely debt-averse. Honestly, in my 10+ year career between being a banker and a mortgage specialist, I’ve genuinely seen a client pay out his entire mortgage balance within about 4 years through lump-sum and double-up payments on top of the ‘normal’ monthly payments. Some lenders will allow borrowers only 10% per year, and some will allow as much as 20% per year. Some lenders will restrict prepayment to ONLY on the yearly anniversary date and some say as long as it’s more than $100, you can make them any time you want.

The counterpoint of prepayment ability is being able to skip a payment. Do you work on commission or in a relatively high-turnover line of work? If there may be a case where you need to skip a payment, be sure to let your Mortgage Specialist know that this is important in your world.

A good piece of advice for mortgage borrowers: Choose your mortgage product and term relative and relavant to the timeline that you intend to hold the property. If you are concerned about rate volatility, you’re probably going to be happier with a fixed rate versus a variable rate. If it’s your primary residence, even if you plan on living there for only 3 years, your mortgage is usually portable and you can move it with you from property ‘a’ to property ‘b’. If you’re financing an investment property, what is your exit plan? Quick flip within a year or long term hold through several economic cycles?

Simply put, the features of a mortgage should fit your personal goals, both today but also in the future. It’s important to understand what you are signing for when you ‘sign your life away’ at the closing session at your lawyer’s office. To make sense of it all, mortgage professionals are here to help you navigate the maze. Put us to the test and you’ll understand the value of a Mortgage Specialist.

Helping you make educated decisions about your financial future,

James C. Tworek and The Trimor team!
info@trimormoney.com
www.trimormoney.com