Mortgage StrategyYou keep hearing financial experts telling you that your personal mortgage strategy needs to match your mortgage selection.
Selecting a mortgage should be easy, right? I mean our parents were never given a choice. They walked into their bank and the loans officer slid a contract in front of them and they signed. There were few choices anyway and back then shopping for rates and features was unheard of. Everybody offered the same thing, so you went with the flow.
Since the dawn of the mortgage specialist, there have been many new options available to today's customer. The products are driven by customer demand and new lenders creating niche markets of boutique mortgage products. The big 5 Canadian banks pick and choose the ones they like and incorporate them into their own mortgage programs and there you have the evolution of the need for mortgage strategy.
So, how do you choose? First, your current circumstances will play a large roll in what you should choose. You make the best decision you can, with the information that you have available. That way you can always feel good about your decision.
Fixed closed mortgages are the traditional comfortable stress free mortgages that are the same as the ones our parents got. Why would you choose this mortgage? You will know what your payments are for the term that you choose, because the only time you negotiate rate is when they get renewed, when your term is up (6 month-10 year term options). The lifetime (amortization) of these mortgages can be up to 40 years (35 year CMHC maximum). If you can lock in a rate near the historic lows, you will benefit over the long-run. If you have pre-payment options you can pay your mortgage way ahead of schedule.
The negatives...payments are slightly higher than variable rate, penalties are very high to pay it out.
I recommend this payment if you are traditional and don't like stress. I also recommend this if you are living close the the end of your budget.
Fixed Open Mortgage If your plan is to mortgage for a short term, the fixed open mortgage is a good value. There are no penalties to break the contract. As an example, if you are buying to fix up a property and flip it for a profit, this would be a good choice.
The negatives...rates are about 4 percent higher than regular rates, because the lender knows he will not get a penalty when you are ready to pay it out. If your original plan to pay out this mortgage falls through, you will have to continue paying a very high rate, until you figure out how to either refinance or sell.
I recommend this if you have a short term plan, because the penalty savings will make sense.
Variable closed mortgage are for those customers who can afford to weather increases in interest rates. Rates currently are low and are forecast to stay low for a while, but when they do move, there is really only one way they will go. The penalty to break these contracts is usually a 3 month interest penalty, whether you refinance or sell. Currently these rates are extremely low and if you do the math, they can currently save you a lot of interest. Look for the terms that offer you prime or better. Sometimes you can get your variable rate at less than prime, so whenever the rates move you are below the lender's prime rate for the term of your variable rate mortgage. As an example prime minus .25% will give you the rate some of today's brokers are advertizing for 2% because 2.25% (today's bank prime) minus .25% = 2.00%. Another example is if the rate swings to say 2.50% your rate will be 2.25% etc. Read the previous variable rate blog.
The negatives...if the rate doubles (historic average rate in Canada is 7.5%) can you afford to pay twice as much as you are currently paying? The lender will offer to let you fix your rate if the rate starts to climb. You will be able to lock in at the new rate available, not today's historic low rates.
50/50 Split mortgages are the product of the evolution of mortgages. They are a split between a closed mortgage (to protect at least half of the mortgage at today's fixed rates) and a variable rate mortgage (to gain the benefit of today's incredible floating rates). The rate you pay is the average of the 2 plans. So you could pay 4% on a fixed 5 year plan and 2.25% on a variable, so your starting rate would be between the two rates. Now, if the variable rates skyrockets you still pay the average between the two products but half of your mortgage will anchor you, so the fluctuation will not be too stressful. For example, if within the 5 year term the variable jumps to 5%, your average rate would only be 4.5%.
The negatives...not many. You will have payment adjustments to make on half of your mortgage (assume they will eventually go up, not down). You will still have a penalty, but it won't be as high as the fixed closed rate.
I do recommend this mortgage if you are just slightly adventuristic and can afford to increase your payment a bit.
Watch for my next blog to see part 2 of this mortgage strategy feature.
What would you like to know about mortgage strategizing?
