One of the most important things you can do when you are considering buying a home is to choose the right mortgage strategy (hypotheque). Too many borrowers only think about interest rates, not realizing that choosing the right mortgage strategy can save them tens of thousands of dollars, while the savings on interest rates can be very low. (If you want to understand more about this concept, read How to beat the best rate!)
How do you find the right mortgage strategy? You can’t. You have to enlist the help of a professional who can create the strategy for you. Why is this? First, you don’t know where interest rates are going in Canada. Second, you have have a complete understanding of 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 consultant.
All of these issues, 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 (prets hypothecaires) 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.
To completely understand interest rates would take a lifetime of academic study, but there are basically three interest rate situations and two rules that interest rates follow. Situations:
- Interest rates trend higher. (This was the situation from 1950 to 1980.)
- Interest rates trend downwards. (This was the situation from 1982 to 2003.)
- Interest rates stay in a small range. (This was the situation from 2003 to 2006.)
If you don’t understand these trends and use the wrong strategy, you could end up paying as much as 20 times more in mortgage costs over the life of the loan.
Interest rates follow two rules, one, that interest rates are indicative 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.)
Predicting interest rates is just about impossible. Over the last thirty years interest rates have increased, averaging 9.25%, but recently have been decreasing and are now approaching 5%. At this level, you may have considered a fixed rate mortgage for five years. But that strategy has been the most costly over the past decades.
Mortgage consultants (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.
He may decide among the following strategies:
- A five year fixed term loan that is renewed every five years.
- A fixed rate loan for 10, 20 or 25 years.
- A variable rate loan based on the Bank of Canada base rate.
- Using the Smith Maneuver where the borrower can deduct interest from income tax.
- Using the equity in a home to supplement retirement income.
- Calculate the cost differences between renting while saving for a down payment, or opting for a no down payment loan.
- Using a loan to improve a credit score for an eventually cheaper loan.
Good mortgage planning (Intelligence Hypothécaire) and finding the right mortgage strategy in each situation is what a mortgage broker will do in order to save home loan expenses, sometime as much as 20 times or more, over the life of the loan.
That’s what a mortgage broker will do when he meets with a client. Each person’s individual needs and goals 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 consultant (Intelligence Hypothécaire) can result in paying too much. A consultation is free, not having a consultation is very expensive.