When we get invested in a subject that needs deliberation, there is a danger that we put the proverbial cart before the horse.
In the world of mortgages, there is a question that is frequently the first one asked by individuals seeking mortgage information. That question is, “what is the lowest rate can I get?” Don’t get me wrong. It is a great question and one that needs to be asked. It’s just that it is often asked before it can be answered.
You might be wondering, “what stops it from being answered?”
The simple answer is that rates are the output of a mortgage underwriting process and that process requires inputs before there can be an output.
Hold on to the “what is the lowest rate can I get?” question until you have had the opportunity to reflect upon your future housing and financial considerations. For instance, if you anticipate needing a different property in less than five years, then that might impact your choice between fixed and variable terms. That choice will impact the rate.
If you think variable is the way to go, then you need to understand that the qualifying rate that is used to determine your ability to handle the risk associated with variable rate mortgages is significantly higher than the actual rates offered. If you can’t satisfy the financial ratios at the qualifying rate of interest, then you will not be a candidate for a variable rate mortgage.
If you prefer a fixed term mortgage, be very mindful of the prepayment penalties. These penalties can be extremely high, particularly from the chartered banks. You might think that this won’t be an issue for you but you should be aware that about 64% of Canadians come out of a five year mortgage at about the three year mark. Why? The reasons include: getting married; started a family and need a bigger house; moved with work; marital separation and my dream house came on the market.
One final consideration ahead of the rate question is the selection of the amortization period. We might go into the mortgage discussion thinking that we intend to pay it off in the shortest period possible. However, you might decide that the monthly payments associated with a 35 year term are very attractive. You might also receive periodic lump sum payments that can be applied to your mortgage without penalty. This approach would keep your monthly payments low while reducing the total time required to payout your mortgage.
When you’ve thought about and discussed the above with your mortgage professional, now you can ask about the rate.
Now the horse is in the proper position to pull the cart and you can get the rate that is right for you.