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Make sure you choose the right home loan strategy for you. You will be amazedat how much you will save if you concentrate on the right mortgage strategy, rather than concentrating on finding the lowest interest rate. Differences in interest rates are peanuts compared to the tens of thousands of dollars you will save with the right mortgage strategy. (Read How to beat the best rate! to see how this works.)
What's the right mortgage strategy? Well, you probably can't answer that question for yourself. What you can do is consult a mortgage specialist who specializes in custom mortgage packages. Why do you need to do this? The main reasons are:
- We don't know where interest rates are going.
- Economic conditions, both present and future have to be considered.
- A mortgage strategy is a complex, uniquely personalized approach that takes each borrower's situation into account.
All of these factors, and more, will be taken into consideration when you sit down with your personal mortgage consultant. He has the proper training to understand what affects interest rates, which mortgage products are available as well as current economic conditions and, most importantly, he has been trained to use this knowledge as it applies to each client's given status.
It takes years of study to understand the fluctuations of interest rates and there are economists who specialize in only that. Here is what the layman needs to understand about the basics of interest rates:
Interest rates follow an upward trend for a given period of time, they follow a downward trend for a given period of time, and the remain stable for a certain period of time. We have seen this trending in action from 1950 to 1980 when interest rates were rising, from 1982 to 2003, when interest rates were falling and from 2003 to 2006 when interest rates stayed in a fairly narrow range. If you do not understand how this works, you will end up paying too much for your total home loan costs.
Next, you have to understand the rules of interest rates:
Interest rates reflect inflation. If there is an increase in the consumer price index, interest rates should increase.
Interest rates are tied to a country's economic performance. A strong economy will mean higher interest rates, since there is a higher demand for money, and a weaker economy will mean decreased interest rates, since the demand for money will go down. It is also important to understand the rules of interest rates. Interest rates follow two rules, one, that interest rates are reflections of the inflation rate, and two, that interest rates are closely linked to the economic performance of a country. What does this mean? If the inflation rate(the consumer price index) goes up, rates will go up, if the economy is strong, interest rates will go up. (Of course, the opposites are also true.)
The exact prediction of interest rates is almost impossible. We have seen interest rates increase over the last thirty years, with the average rate being 9.25%. Today, however, it is at about 5%. Perhaps at this interest rate level, you think it would be wise\a good idea to consider a 5 year fixed mortgage. But if you had done that over the prior historic period, it would have been a disaster.
There are quite a few mortgage strategies that mortgage brokers have to choose from. An expert mortgage professional can pick and choose from this mixed bag of strategies and design the perfect one for you.
The basic mortgage strategies are:
- A five year fixed term loan, renewed five times (5 times 5)
- A 15, 20 or 25 year fixed rate mortgage (Long term).
- A mortgage with an interest rate that varies, based on the Bank of Canada base rate. (Variable rate)
- Deduct interest paid on the mortgage from personal income tax (Smith Maneuver)
- Use the equity in the residence to add to retirement income. (More retirement)
- Calculate the difference between saving for a 5% down payment while paying rent and taking out a larger loan and avoiding rent during that period.(No down payment)
- Fix credit using a mortgage in order to establish better credit later on. (Less than perfect credit)
The secret is to find the right strategy or mix of strategies for the borrower. In doing so, a mortgage broker can save a client a lot on the cost of the mortgage.
That's what a mortgage broker will do when he meets with a client. Each person's individual requirements and dreams are discussed, and then any mortgage strategies that may be open to him are applied to his situation, under the present and anticipated economic conditions. Not taking these steps with a professional mortgage broker can result in paying too much. A consultation is free, not having a consultation is very expensive.
