Given past and current market conditions, choosing the best mortgage option (rate and term) is the most overwhelming and daunting mortgage process.
Our clients are feeling more pressure than ever to make the ‘perfect decision.’
We are here to simplify this step for you.
Remember, you can only make decisions based on current information.
- Speculation is just that—a guess of what may be to come. Many factors could change easily change predictions.
- You are only deciding for THIS term of your mortgage, not the life of your mortgage.
- Much like the life of your investments, where it would be impossible to perfectly pick the very best time to buy low or sell high. Your investment typically ebbs and flows. Some years earn more, and some years earn less.
- Mortgages are the same. You will save more through some terms, and for others, you may save less.
The most important factor is comfort and affordability.
Understanding the difference between a fixed-rate and a variable-rate mortgage is a good starting point.
A fixed-rate mortgage means that your interest rate stays the same for the entire term of your loan, which can be anywhere from 6 months to 10 years.
A variable-rate mortgage (or adjustable-rate mortgage) means that your interest rate can change depending on the prime rate set by the Bank of Canada, which can go up or down depending on the economy.
Things to consider when choosing a fixed-rate mortgage:
- You have certainty and stability in your monthly payments, which can help you plan your budget and avoid surprises.
- The disadvantage is that you might pay more interest than a variable-rate mortgage if the prime rate drops.
Things to consider when choosing a variable (or adjustable rate) rate mortgage:
- The advantage of a variable-rate mortgage is that you can benefit from lower interest rates if the prime rate falls, saving you money in the long run.
- The disadvantage is that you must deal with fluctuating payments, making it harder to budget and causing stress if the prime rate rises.
So how do you decide which one is better for you? It depends on your risk tolerance and your financial goals.
- If you prefer peace of mind and don’t want to worry about changing interest rates, a fixed-rate mortgage might be a good choice.
- If you’re comfortable with taking some risk and want to take advantage of lower interest rates, a variable-rate mortgage might be a better option for you.
- You should also consider how long you plan to stay in your home and how much you can afford to pay each month.
Another factor to consider is the term of your mortgage. The term is the length of time that you commit to a specific interest rate and lender. The most common terms are five and ten years, but you can also find shorter or longer terms depending on your needs. The term affects how often you renew your mortgage and negotiate a new rate and conditions with your lender.
The advantage of a shorter-term
- You have more flexibility and can switch lenders or renegotiate your rate more often if the market changes or if your situation changes.
The disadvantage of a shorter-term
- Depending on market conditions, you might face higher interest rates or fees when you renew your mortgage.
The advantage of a longer-term
- You have more security and can lock in a low-interest rate for extended periods, saving you money in the long run.
- The disadvantage is that you have less flexibility and might miss out on lower interest rates or better deals if the market changes or if your situation changes.
So, how do you decide which term is best for you? It depends on your personal preferences and your plans. If you value flexibility and want to keep your options open, a shorter term might suit you. If you love security and want to avoid any hassle, a longer term might be preferable. It would help if you also considered how likely you will sell your home or refinance your mortgage before the end of your term, as this might incur penalties or fees.
Ultimately, there is no right or wrong answer when choosing the best mortgage rate and term for your situation. It’s a matter of weighing the pros and cons of each option and finding the one that matches your needs and goals.
Will rates go down soon or shortly?
- There is some speculation that we will see some drops, but the days of sub 2 and 3 percent rates are likely gone.
- This was a blink in time, and rates under 2 and 3 are not “the norm” in a healthy market.
Should you wait?
- Timing is a personal decision and should be based on affordability and comfort.
- The changes in rates are not always as significantly impactful as some think.
- For example, on a $300,000 purchase with a 5% minimum downpayment:
- 5.24% = $1764.59/month
- 4.99% = $1722.19/month
Some will argue that, as rates move down – house prices may increase as more consumers qualify and get excited about entering the market while rates are lower. (ongoing supply and demand issues)
What happens if rates do go down after my mortgage is in place?
- If the mortgage has been funded and you have chosen a fixed-rate mortgage, you are committed to that mortgage for that term.
- If rates significantly drop due to unforeseen market conditions, we will reach out to each of our clients to run calculations to determine IF paying the penalty and getting into a new lower rate makes sense.
- This has happened in the past and is bound to happen again.
What happens if the rate goes down after my approval is in place but before I take possession?
- If rates move down before possession, we monitor this and will apply the discount.
- If rates go up, you are safe.
Is a shorter term better than a longer term?
- This is a personal decision.
- The lenders have recently offered 3- and 4-year rate specials, especially for the consumers wanting more choice on length of term.
- There is never any way to predict the best term choice perfectly.
Are the rates on the internet accurate?
- Not always!
- Many of the low discounts you may see may not apply to your unique circumstances OR may be clickbait or teaser rates.
- Remember, if it seems too good to be true, it likely is.
- Although there is competition in the mortgage space, it varies by .20-.50% (not by 1-2%)
