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So, you’ve decided to buy a home, now what? Buying a house is usually the most expensive purchase in a person’s life, so it should be preceded with caution. Once you decide on the house and location, you must decide on a down payment amount and a mortgage rate that you can afford. A general rule of thumb is to put down 20 per cent of the house price so that you can reduce the amount of money you pay in interest; however, first time home buyers can put down as little as 5 per cent for a down payment if they so desire. When it comes to the mortgage itself, there are options to consider when it comes to fixed or variable rates.
Before you apply for a mortgage, you first need to assess your financial situation. If you are planning to put down only 5 per cent, have an unstable source of income or have the potential to lose your job, a variable mortgage rate may not be for you. Signing up for a variable rate means that your payments will go up and down according to the prime interest rate. This can be a great option for people who are financially stable and willing to chance the interest rates and see if they will go down but still need to afford the payments if the rates happen to go up. If this is not the case, a fixed mortgage rate will guarantee your payments for a set number of years, so you can budget properly. Often, mortgage lenders will sit down with you once a year or when your term is up to discuss the amount remaining and see how you are sitting financially.
Now you’re thinking, is the variable rate worth the risk? History would show that, generally, yes it is. A 2001 survey showed that between the years of 1950 and 2000 almost 90 per cent of Canadian mortgage holders would have been better off with a variable rate. This number has decreased in the past years as the prime rate has started to rise, decreasing the certainty of money saved using this method. When financial experts have posed this very question, they say that interest rates are as unpredictable as ever, so do not make decisions ‘hoping’ for a lower interest rate.
Overall, Moshe Milevsky of York University’s Schulich School of Business says, “I would say go with a floating rate unless you would be disproportionately affected in a recession.” Experts strongly state that when you’re making this decision, you need to make it based on financial planning and not hopeful interest rates. As tempting as it would be to take a variable mortgage rate and pay less than you planned, it is a risk. Just as you wouldn’t gamble $400,000 away, don’t choose a mortgage based on chance. Choose a mortgage that you can afford.