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January 7, 2013
It’s no secret that home ownership is one of the main goals on the short list of personal goals for many Canadians. We are raised to believe it’s the right thing to do, and there are many benefits to owning your own home. It is often in the financial details that we come unraveled and long for a better way.
Specifically, it’s those fluctuating mortgage rates that we as homeowners have absolutely no control over. You can read about them and learn about how they work, but much of the information is contradictory and when interest rates rise, you somehow feel the pain. You’ll never be able to control interest rates, but you can take steps to reduce their impact.
Guidelines to Follow
First-time homebuyers making the lowest down payment available should steer clear of newly constructed homes with long closing dates. There’s a risk these homes could lose their values while interest rates rise.
Estimate your mortgage payments above current historically low rates. Don’t crunch your numbers using the five-year low rate of 3.39 per cent but go with the posted rate – 5.34 per cent – the banks are offering right now. Where rates will be at the time of renewal are just as important as the rate you are signing up for now.
If you opt for a fixed rate, avoid terms that are longer than 3 to 4 years as the average mortgage in Canada only lasts around 3.5 years and 70% of borrowers will refinance before their actual term is up. (As per a CMHC study in 2006); this will save you fees for breaking your mortgage early.
Don’t Fear the Variable Rate
Think about a variable rate mortgage. Currently, they can be had for 2.6 per cent. It’s normal to fear a variable mortgage rate because it can change at any time, which will surely throw a wrench into your carefully planned financial system. However, there are lenders out there that will give you all the available discounts, let you switch to a fixed rate whenever you want, and put it all in writing. Historically variable rates have outperformed a fixed rate strategy roughly 8 out of every 10 times, so speak with your mortgage advisor and see if the variable rate is the right choice for your financial situation.
The Rate Hold
Get pre-approved with a rate hold as quickly as you can. A rate hold clause is a provision that determines how soon before your mortgage renewal date you can lock in the prevailing mortgage rate. Getting pre-approved can help protect you against big jumps in rates for the short term.
Seek Out An Expert
For variable-mortgage holders, when in doubt, get some expert help. Don’t be afraid to get professional advice if you aren’t sure when is the best time to lock in a rate. Considering checking in each month with an independent mortgage broker on when is the right time to make the switch from a variable-rate mortgage to a fixed one.
Remember, if the value of your property drops below the price you paid for it, it can be more difficult to land a mortgage since the bank will use the appraised value as the basis for its loan.
Refinancing Closing Costs
If you go the route of refinancing, first ask your lender to make clear any and all closing costs. Lenders in refinancing will charge you for loan expenses, so be clear from the start by having your lender lay out the options. You can then pick the best one for you.
And finally, if you’re worried about an uptick in interest rates and are looking to sell, remember that closing a deal can take a long time – from months to several years in some cases. Keep this in mind as you plan your timetable. You won’t be able to work the system completely to your advantage every single time, but interest rates aren’t always rising either. If you are conscious of the situation and proactive in your approach, you’ll come out on top more often than not.
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