“Wow!” you say to your spouse as you hit the brakes on the car. “Did you see the mortgage rate those guys are advertising?” Your worries are over, you’re thinking. Just lock in a rate like that for the next ten years, and you’ve got it made.
Not so fast. ThaI rate may not be the one for you. Typically, the lowest available rate – and the one that makes the rate sign look great from the street – will be for a variable-rate mortgage. That variable rate has the potential to be like a roller coaster. The posted variable rate is the rate you’re getting today. Unless you have an economic ouija board, you won’t be able to predict what kind of ups and downs are ahead of you.
Let’s take a closer look. A lender will offer different rates for different types of mortgages . The rates are determined based on financial risk – to the institution and to you. When a customer is willing to take on the risk, he/she is rewarded with a lower rate. If the lender is taking on the risk (that is, the customer is promised a particular rate… regardless of what happens in the future), the rate is higher. The longer the term, the higher the risk for the financial institution.
Fixed-rate mortgages, because they require a low risk tolerance, are usually better suited to first-time buyers or those who haven’t owned a home for a very long period. Ask yourself these questions: Do you consistently watch rates? Do you have less than 20% down? If you answered “yes” to all, or most of these questions, a more conservative fixed-rate mortgage could be the better choice for you.
A variable-rate mortgage is best suited to people who have a flexible budget and can tolerate higher risk. Ask yourself these questions: Do you watch market conditions? Can you handle sudden rate increases that could also significantly increase your payment? Would you take advantage of lower rates by increasing your payments and/or using your prepayment privileges to pay down your mortgage faster? Do you have 20% or more equity in your home? If you answered “yes” to all , or most of these questions, a variable-rate mortgage might best suit your needs.
Some lenders offer a “negotiated rate” or 1% off posted rates at the time you wish to “lock in” your mortgage to a fixed rate. How do you negotiate a rate after you are already locked into a closed variable product? Ask your broker about lenders who offer wholesale rates at time of “lock in” to avoid the high likelyhood of locking in at a much higher than market rate.
If the uncertainty of a floating rate is going to keep you awake at night, you’re not alone. Most Canadians prefer the certainly of a fixed-rate mortgage in today’s economic environment. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly… with no financial surprises.
Regardless of going fixed or variable, I think it is important that you ask your mortgage provider, bank or broker 5 quick yet very important questions. I think you would agree, your mortgage is probably the largest liability you will ever have, right? And as a result, it deserves as much attention and planning as the asset side of your balance sheet. Would you not agree? Here is a great resource of mine which I created to help consumers ask better questions, 5 Critical Questions.
Feel free to give me a shout for a strategy sesssion where we go through a needs assessment and walk you through a series of charts/graphs and forecasting models. I look forward to hearing from you.
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