One of the most important things you can do when you are considering buying a home is to choose the right mortgage strategy (hypotheque). Too many borrowers concentrate on interest rates, not realizing that choosing the right mortgage strategy can save them tens of thousands of dollars, while the savings on interest rates can be very low. (If you want to understand more about this concept, read How to beat the best rate!)
O.K., you say, I’ll find a mortgage strategy. This is not an easy thing to do for a nonprofessional. The issues surrounding the choice of a strategy (or combination of strategies) are complex, and require some professional knowledge. You don’t understand the interest rate trends in Canada, you don’t fully understand all the economic factors that influence interest rates, and you do not know enough about mortgage products to pick the one(s) for you. You need to call upon the help of a mortgage consultant.
All of these factors, and more, will be taken into consideration when you sit down with your personal mortgage consultant. He has the proper training to understand what affects interest rates, which mortgage products (prets hypothecaires - refinancement) are available as well as current economic conditions and, most importantly, he has been trained to use this knowledge as it applies to each client’s given status.
To completely understand interest rates would take a lifetime of professional study, but there are basically three interest rate situations and two rules that interest rates follow. Situations:
- Interest rates trend higher. (This was the situation from 1950 to 1980.)
- Interest rates trend lower. (This was the situation from 1982 to 2003.)
- Interest rates stay in a narrow range. (This was the situation from 2003 to 2006.)
If you don’t understand these trends and use the wrong strategy, you could end up paying as much as 20 times more in mortgage costs over the life of the mortgage.
Interest rates follow two rules, one, that interest rates are indicative of the inflation rate, and two, that interest rates are closely linked to the economic performance of a country. What does this mean? If the inflation rate(the consumer price index) goes up, rates will go up, if the economy is strong, interest rates will go up. (Of course, the opposites are also true.)
Trying to predict interest rates is next to impossible. Interest rates over the last thirty years averaged 9.26%, whereas they are now at about 5%. With this rate, you may choose to take out a 5 year fixed rate home loan. Remember, by doing so, even without realizing it, you have chosen a mortgage strategy, and this one could be a disastrous one. Refinancing every five years in an increasing interest rate environment would have cost a fortune.
Which strategies do professional mortgage consultants (courtier hypothecaire) look at? There are a number of basic strategies, and an informed mortgage broker will consider any of them, and even design a customized one that is a combination of two or more.
Here are the basic mortgage strategies:
- 5 times 5-A fixed term five year mortgage, renewed 5 times.
- Long term-a fixed rate mortgage for 15, 20 or 25 years.
- Variable rate-a home loan with an interest rate that changes based on the Bank of Canada base rate.
- Smith Maneuver-the borrower can deduct mortgage interest from income tax.
- More retirement-the equity built up in a home is used to create retirement income.
- No down payment-calculate the cost of renting while saving for a down payment as compared to taking a larger loan.
- Less than perfect credit-use a loan to repair credit so a mortgage will be cheaper later.
The secret is to find the right strategy or mix of strategies for the client. In doing so, a mortgage broker (Intelligence Hypothécaire) can save a client a lot on the cost of the mortgage.
That’s what a mortgage expert will do when he meets with a client. Each person’s individual needs and goals are discussed, and then any mortgage strategies that may be open to him are applied to his situation, under the present and anticipated economic conditions. Not taking these steps with a professional mortgage consultant (Intelligence Hypothécaire) can result in paying too much. A consultation is free, not having a consultation is very expensive.