If you are asking yourself how to get the best interest rate (taux hypothécaire) on your mortgage, you are asking the wrong question. (For more about that, read How to beat the best rate!). What you should be thinking about is how do I choose the right mortgage strategy for my particular needs.
How do you find the right mortgage strategy? You can’t. You have to join forces with a professional who can create the strategy for you. Why is this? First, you don’t know what interest rates are going to do in Canada. Second, you have to fully understand current and future economic factors. And thirdly, you need to design a strategy that is individualized. For all of this, you need a professional mortgage specialist.
With the expertise of an experienced mortgage professional, the two of you can sit down and design the exact product that will work for you. You see, he has been trained to know and understand each of the mortgage products (prêts hypothécaires) on the market, and know how each one would apply in a given set of circumstances. In addition, he understands the economy in general and probable impact of interest rate trends over the projected life of your mortgage.
It takes years of study to understand the movement 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 certain period of time, and the remain stable for a given 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 are not familiar with how this works, you will end up paying too much for your total mortgage costs.
Next, you have to comprehend 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 increased interest rates, since there is a higher demand for money, and a weaker economy will mean lower interest rates, since the demand for money will go down. It is also important to understand the rules of interest rates.
Trying to predict interest rates is futile. Interest rates over the last thirty years averaged 9.26%, whereas they are now at about 5%. With this rate, you may choose to take out a 5 year fixed rate home loan. Remember, by doing so, even without realizing it, you have chosen a mortgage strategy, and this one could be a disastrous one. Refinancing every five years in an increasing interest rate environment would have cost a fortune.
Mortgage brokers (courtier hypothécaire) have a number of mortgage strategies that they structure and customize for each borrower. A professional such as this will look at each option and find the right one for his customer.
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 supplement 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 (Taux hypothecaire) can save a client a lot on the cost of the mortgage.
Your mortgage broker will explain each of these strategies and review if and how they would work in your individual circumstances. He is also able to gauge the economic environment to help you make the right decision. If you want to choose the best mortgage strategy, make it your strategy to meet with a mortgage broker (courtier hypothécaire). Such a consultation costs nothing may end up saving you thousands.
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