Not all Mortgage Choices Are Created Equal
Ah yes, here we go again. The banks are raising interest rates, the consumers are up in arms, some in the media are scaring people into thinking the economic world is ending. But what does reality look like for a strategic investor or homeowner? Well hopefully this post will provide some perspective so you can make smart & strategic choices.
The first thing we have to remember is that POSTED fixed rate mortgages have seen a slow but persistent climb upwards throughout the year., (the important word in that sentence, as you will quickly find out is POSTED. Back in June, the banks also attempted to raise their posted fixed mortgage rates in response to Federal Finance Minister Jim Flaherty admonishing them for having such low rates and thus potentially inflating the real estate markets in key cities. (in fact he is still keeping a watchful eye on the Canadian housing market as showing in this interview: Finance Minister keeps watchful eye. Back in June, the banks moved the posted rates up in response to direct telephone calls from the Ministry of Finance, however at the same time (behind the scenes), they increased the available discounts that savvy consumers (such as REIN Members) could negotiate… if they bothered to ask properly.
Learn to Ask For Deep Rate Discounts – they are out there and change often.
Depending on the financial institution, bank managers receive a daily or weekly email/spreadsheet that outlines the available posted rate discounts that their branch can offer to their clients. These available discounts can change quite regularly and vary based on the term the consumer chooses, the rating of the customer and some bank manager discretion. That means on one week, the bank may be offering deep discounts on seven year mortgages and not as much on three year terms. Then the following week this could reverse, so it is important for consumers/homebuyers to ensure they are asking for the different available discounts and looking at all their options before just blindly signing for the typical 3 or 5 year mortgage.
Some Consumers Are Confused By Headlines
Right now many consumers are confused and assume when they hear that mortgage rates are going up, it means theirs is gong to rise. Homeowners must understand that if they are in a variable rate mortgage, these changes do not affect them (until the banks decide to increase their ‘Prime’ rate). Conversely, if they are already locked in for a term, the announced rate changes or an announced Bank of Canada prime rate hike does not change their current rate or payment.
Fixed Rates Are Increasing
Yes, fixed rates are increasing, but they are still historically very low. For some perspective, follow this link and scroll down to the second graph for historic five year discounted mortgage rates from 2006 to today: Historic 5 Year Discounted Fixed Mortgage Rates via RateHub.
Variable Rates Are Steady
The Bank of Canada has signaled that they don’t intend on pushing up their prime rate until 2014 (and even then it will be a slow rise) so variable is still an option for many homebuyers. There are still discounts available in this arena as well and as above, it is important to keep perspective on the rates we are paying today on variable mortgages. Follow this link for the historic variable rate percentages: Discounted 5-year Variable mortgage rates
If an investor or homeowner chooses the variable option, they should make payments at the equivalent of the locked-in rate. This serves two purposes:
1. The additional payment will go directly to principal paydown, thus shortening the length of time it takes to pay off the mortgage – meaning that you are paying yourself this extra money monthly, rather than paying the bank that amount.
2. It builds in a financial buffer for the inevitable prime rate increase – whenever that event occurs. When the payments increase due to an increase in variable rates, the mortgage holder will already be used to this higher payment, it just means that the principal won’t be paid off as quickly.
It always pays to keep perspective, and in this case it literally pays you to keep perspective… right into your bank account.
Remember, in the end, “He Who Has The Gold Makes The Rules” and in this case it is the banker who has the gold and therefore sets the lending rules. That is why you, as a strategic investor or homebuyer, must know the rules, know the ins and outs and know how to make them work for you.
Come on out to one of our upcoming ACRE Real Estate bootcamps and learn many more tricks, strategies and actions that are designed to reduce your risk as you become much more strategic. Here are the next two upcoming, click on the links for more details and a special discount:
Edmonton: October 18th – 20th
Vancouver: November 15th – 17th
Trust this helps – See you there.