Choosing your mortgage strategy
by Glen Jacobs
A good mortgage strategy will save you a lot of money: thousands and even tens of thousands of dollars on a $100,000 mortgage.
It’s considerable.
(If you haven’t read the article How to beat the best rate! I recommend you do so before continuing.)
We will now take the time to answer a big question: |
|
| |
How to choose the right mortgage strategy?
The easy answer: contact a mortgage consultant who specializes in creating custom mortgage strategies for their clients.
Why?
There are three good reasons:
- Nobody knows the future of interest rates in Canada.
- The right strategy must take into account the current and future economic context.
- One has to customize it according to one’s objectives and personal situation.
All this is not easy, and it is best to consult a mortgage professionnel who does this every day.
But let’s not stop there.
The more difficult response is to analyze several factors in creating a mortgage plan.
To choose the right mortgage strategy you must:
- know the strengths and weaknesses of available mortgage products;
- identify your current position in the interest rate cycle; and
- evaluate the probability of an increase or decrease in rates over the next 10-15 years.
The interest rate cycles.
There are essentially three scenarios and two fundamental rules to understand interest rates (all this could take up several books, but we’re going to keep it as simple as possible).
Scenarios:
- Rates are generally increasing (1950-1980)
- Rates are generally decreasing (1982-2003)
- Rates are generally stable (2003-2006).
The two rules:
- Interest rates follow inflation. When the consumer price index goes up, rates increase and so on.
- Interest rates are linked to the economic health of Canada and the United States. When everything is going well the rates increase, and when things go poorly they decrease.
Nobody knows the future of interest rates. All we know is that the average interest rate over the last 30 years is 9.26%1 and that now it is approaching 5%.
Each of these scenarios demands a particular strategy. It could be disastrous to adopt a strategy conceived for descending rates and then see them climb.
You might tell yourself “I won’t risk making a mistake, I’ll just take a 5-year fixed rate mortgage!”
But this too is a strategy, and for the past 30-50 years it has often been the worst and most costly.
What are the different strategies?
There are several basic strategies, each possibly consisting of several options, and it is often advantageous to combine two strategies to take advantage of the market.
All this to say that it is better to consult an accredited mortgage professionnel.
The basic mortgage strategies:
- 5 times 5 – renew a mortgage five times with a fixed term of five years.
- Long-term – a fixed-rate mortgage for 15, 18, or 25 years.
- Variable rate – mortgage whose rate varies with the base rate of the Bank of Canada.
- ‘Smith Maneuver’ and the cash flow dam – a strategy that permits you to eventually deduct interest paid on a private house from your personal taxes (salaried or independent worker).
- More retirement – an efficient manner of using the equity in your home to augment retirement income.
- No down payment – This strategy allows one to calculate the savings and buy right away without a down payment, rather than rent an apartment while you accumulate the minimum down payment of 5%.
- Less than perfect credit – help re-establish a poor credit rating in order to obtain an excellent rate in the near future.
|
By comparing these strategies you will learn to appreciate what good mortgage planning can do, and enjoy savings over the entire life of the mortgage.
Don’t forget that a good strategy is 21 times more important than simply negotiating the best interest rate.
Each strategy deserves its own personal explanation and should be coupled with your long-term objectives and the current state of the Canadian economy.
How to choose the strategy that is best for you?
I advise you to contact a professionnel in mortgage planning to establish a personalized strategy. It’s free and … enriching.
|
