Mortgage planning - fixed rate, variable, pre-approval?
Posted Mar 4, 2010 By EMC News
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Tweet ThisEMC Lifestyle - Mortgage rates are quite low right now and, in many parts of Canada, it's a buyer's market for residential real estate.
That may have you thinking about purchasing your first home or upgrading from your current abode. Either way, the first item on your real estate shopping list should be a solid understanding of the mortgage options available to you. Here is some basic mortgage info to get you going.
Should I go with a fixed rate or a variable mortgage? There is no single right answer to this question. It really boils down to selecting the option most suited to your needs.
Fixed rate mortgages offer the security of a locked-in interest rate for the term you choose, typically one to five years.
Keep in mind that, when your fixed rate mortgage comes up for renewal, your choices will be determined by mortgage rates available at that time.
Variable rate mortgages may have a lower interest rate than fixed rate mortgages but the interest rate is linked to the Prime Rate and fluctuates with it. That could mean decreases or increases in the rate you pay over the term you select and a corresponding impact on both total interest costs and the amount of your mortgage payment.
One Canadian study* that examined interest rate data from 1950 to 2007, found that choosing a variable rate mortgage over a fixed rate mortgage would have saved consumers $20,000 in interest payments over 15 years (based on a $100,000 mortgage). But that still doesn't mean there is a 'one-size-fits-all' solution.
Blended rate mortgages are another option that has been gaining in popularity. They offer a combination of both fixed and variable rate financing - a split rate structure that combines the benefits and risks of each type of mortgage.
Mortgage pre-approval may be something you are considering because having your mortgage financing firmly in place indicates to prospective sellers that you are a serious buyer and it can give you the security of negotiating for a house that falls comfortably within your means.
The danger is that, while you are trying to obtain approval for the largest amount available, you may get caught in the trap of stretching your finances to the maximum and putting your family's finances at risk if your circumstances change or there is a significant interest rate increase at renewal time.
The best mortgage choice for you should be firmly based on your personal financial objectives and your overall financial plan.
Talk to your professional planner to ensure you don't over-mortgage your financial future.
*Study by Dr. Moshe Milevesky, Executive Director, Individual Finance and Insurance Decision Centre, Associate Professor of Finance, Schulich School of Business, York University, Toronto, author of six books and 50 peer reviewed articles.
This column, written and published by Investors Group Financial Services Inc. (in Québec - a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments.
Contact a financial advisor for specific advice about your circumstances.
For more information on this topic, please contact your Investors Group Consultant.
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