We often receive inquiries from potential borrowers looking for some tips about navigating through all of the mortgage options available to them. We usually start out with a discussion about their specific mortgage requirements and home ownership goals, as nothing replaces a custom solution. If they are not really sure what their requirements or goals are, we instead provide some general recommendations based on our experience. This week I want to share a really brief overview of the most popular questions we see along with some suggestions to help you decide which options may be best for you.
Buy now or wait
If you’re waiting for rates to go down, it’s likely not going to happen and if you’re hoping housing prices will decrease, that “may” happen, but we don’t know when and by what amount they will decrease. If you’re thinking long term, I believe any time is a good time to buy because real estate is a fairly stable investment if you’re planning on staying a while. Short term home ownership goals under buy and flip strategies could be a bit more difficult to achieve if you’re depending on any immediate equity growth, we’re not seeing property values go up at a quick pace these days. It’s also important to be aware that qualifying for a mortgage could be more difficult in the future if we see additional mortgage rule changes. We have a great rent or buy quiz if you want another opportunity to test your home-buying readiness –> CLICK HERE.
Increase your downpayment or pay off debt
Paying down your personal debts will most often allow you to qualify for a higher mortgage amount. If you do have a fair amount of personal debt, sometimes it’s best to speak to the mortgage professional PRIOR to actually paying down the debt, they may direct you on exactly what debts are best to pay down first. If you are able to increase your downpayment, this will lower your high-ratio mortgage insurance premium (if applicable) and decrease your monthly mortgage payments. Though do keep in mind, as the mortgage is amortized over 25 years, sometimes more downpayment doesn’t significantly reduce the payment amount. If you do decide to pay down debt versus putting a higher downpayment than is required, you may see your total monthly payment obligations are reduced.
Fixed or variable interest rate
I recently wrote an entire article on this, so consider this just a conversation starter leading to a more detailed discussion with your mortgage professional. The pro of a variable rate is historically it has seen interest savings over its fixed counterpart. The con is fluctuating payments could also accompany a variable rate mortgage as the rate charged is dependent on where the Prime Rate is at. The Prime Rate is reviewed by the Bank of Canada every 6 weeks.
Alternatively, fixed rates offer an unchanging rate and a set monthly payment for the length of term you select. Also a notable difference between the two is a fixed term of 5-years or longer features a lower qualifying rate than that of a variable rate mortgage term.
Short or long mortgage term
With access to a large selection of term lengths, be advised the decision of which one to take at the time of a purchase may not always be yours to make. The reason why is if you choose any term longer than 5 years you are qualified at the rate in effect for that term, 5 year fixed rates these days is around 2.79%. Yet, if you choose a 4 year term or shorter or a variable rate term, you must qualify at the government set benchmark rate which is 4.64% today*! Further to that, given you face a potential payout penalty if you break your mortgage term early for any reason it is important to have some forethought when it comes to choosing a term length which is right for you. On that note, you may be interested to know that Canadians typically will make changes to their mortgage every 3.8 years.
Monthly or “accelerated” weekly or bi-weekly payments
That’s an easy one, the accelerated payment frequencies will work out the same as you making one extra monthly payment per year directly onto your mortgage principal. Monthly payments may be more convenient for you and if that’s the case, do try to utilize some of your allowable pre-payment privileges to lower your mortgage balance. Applying lump sums or increasing your monthly payment amount even a little will bring about a lower mortgage balance come renewal time
Refinance now or wait until renewal
At mortgage renewal time, you can make some changes to your mortgage with no penalties. Though if you want to increase your mortgage amount or extend the amortization, whether it is in the middle of your term or at renewal time, it is considered a refinance. A mortgage refinance involves you having to re-qualify, provide a bit more documentation and there is a chance of a few out of pocket expenses. The decision to break your term and refinance your mortgage is not always an easy one. If you are considering breaking the term early in order to secure a lower rate, which could result in lower payments, ensure you’ve done the math to confirm the financial benefit outweighs the potential payout penalty. If your goal is to access home equity in order to pay off high-interest debt and reduce overall payments, the refinance before the renewal date makes perfect sense. Have your mortgage professional do some amortization schedules for you so you are then able to make a decision based on the facts of exactly what it will cost you in the long run.
Even with the mortgage rule changes over the past few years, there are still a lot of mortgage options available to potential borrowers. If you’re thinking of getting a mortgage, the first step is to get your finances in order to determine your approval eligibility. Then narrow down your mortgage choices to one that suits you best by prioritizing what’s important to you and lastly, have a conversation with your mortgage professional.
For all your mortgage needs, contact Jackie at 780.433.8412 or firstname.lastname@example.org. Stay in the loop by following on Twitter @Mortgagegirlca.
*Benchmark rate as of Feb 15,2016. Rate is subject to change without notice.