17 Jan More to a mortgage than the Interest Rate to consider!
More to a mortgage than the Interest Rate to consider!
There are many decisions to be made when obtaining a mortgage. Two fundamental elements are the term and the amortization.
The amortization is the length of time it takes to pay the mortgage off, and most borrowers choose 25 or 30 years. A 30 year amortization is only available to someone with a minimum 20% downpayment. Amortization is broken down into terms which is the length of time a rate is guaranteed for. Typically terms run from 6 months to 10 years. When deciding on a term it is important to consider any potential life changes that might occur during the term and to consider where we are in the economic cycle, ie. are rates likely to increase or decrease during the term. Paying a mortgage off mid-term may result in significant penalties. Penalties for fixed term mortgages are based on current rates, your mortgage rate, the balance of your mortgage and the time to maturity. If your rate is higher than current rates you should expect a significant penalty. Calculations do vary between lenders – monolines (deal solely in mortgages) typically have lower penalties than banks. However, read the fine print. Sometimes rate specials come with restrictions and higher penalties. The penalty for a variable rate mortgage is typically interest only.
Porting your mortgage is at the discretion of the lender but it is generally broadly available. A port allows you to keep your existing rate for the balance of the existing mortgage. If your new mortgage is larger than your old one your lender will provide the new money at new rates so you will have a blended rate although some lenders will set up the new money as a separate mortgage but under one umbrella charge. If there is a difference in the dates between your sale and purchase you can also obtain a bridge loan (again at the discretion of the lender). Terms, rates and fees vary from lender to lender. The bridge loan allows you to access your equity prior to your sale. If the loan is large enough the lender may register a charge against your existing property to protect themselves in the rate event that the sale falls through. Another option which is rarely used is a mortgage assumption whereby the purchaser assumes the mortgage of the seller. The assumption is dollar for dollar and some lenders will require that the seller remain financially responsible for the mortgage.
The Importance of Term Selection
The burning question right now for anyone purchasing, renewing or refinancing is what term makes the most sense. The 5 year fixed term has certainly been the most popular for many years, but that is not necessarily the case right now. The key consideration is whether or not the Bank of Canada will be successful in bringing inflation down to the 2 to 3% rate that is their mandate. There are mixed signals right now. Job creation is strong which indicates that demand for goods and services is strong which does not bode well for a decline in the inflation rate. On the other hand, economists are still predicting a recession within the next 12 months which should bring rate relief. If you choose a 5 year term right now and rates have peaked you will be saddled with that rate for the remainder of the 5 year term or face a steep penalty to break it.
In making the decision you should consider (and research) the following:
- Are there indicators that inflation is moderating
- What is happening with the job market
- Is the economy slowing
- How committed is the Bank of Canada to managing inflation
- Once inflation starts to moderate historically how fast do rates fall
You should also consider your own risk tolerance.
Currently there is nothing wrong with giving serious consideration to 1, 2, and 3 year terms (as well as variable terms).
A mortgage professional will be able to provide you with the data to help you make an educated decision.
Source: Karen Lemieux, Mortgage Brokers Ottawa
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