Today’s buyers have almost an unlimited number of mortgage financing options to choose from. If you cut through all the marketing hype, you are going to be essentially selecting from one of three options:
1. Fixed rate mortgage, where your interest rate and payment remain fixed for the length of the term.
2. Variable rate mortgage, where the rate moves up or down as the Canadian prime rate moves up or down. Your monthly payment is fixed based on the current rate.
3. Line of credit (LOC), similar to the variable rate mortgage, where rates will move up or down but your payments remain flexible.
If you are wondering which loan program is right for you, you’re not alone. The best fit for you depends on your individual financial situation, family situation, your tolerance for risk, investment strategies and on how long you plan to own the home.
Questions to consider:
• Do I expect my current income to significantly change over the next five years? If so you may want good prepayment options. If self employed, does your income normally fluctuate?
• Can I tolerate possible increases in interest rates to achieve an overall lower rate over time, or would I sleep better with a fixed monthly payment? Historically variable rates have proven to be the most cost effective over time, but if you want cost certainty you may prefer fixed. If financing an income property, you may want cost certainty because your rental income will be fixed, so you may want to avoid any variable rate mortgage surprises.
• Do I want to pay off my mortgage as quickly as possible, or would I prefer to take any extra money and direct it to other investments? Mortgage money is relatively cheap. You may chose to defer paying on your mortgage and instead use the money for other investments offering a better return, or alternatively you may prefer to pay it off asap. A line of credit gives you the option of borrowing against your mortgage limit for investment purposes.
• Do I plan to move in the next five years? If you anticipate any major changes in your circumstances; a new job, getting married, obtaining an inheritance, etc; you may want to consider selecting a mortgage term that coincides with that event. If locked into a fixed rate mortgage you will have to pay a penalty to break your mortgage early. Uncertainty in your circumstances may suggest you consider a variable mortgage or a LOC.
Armed with this information, your mortgage broker will be able to direct you into the best mortgage product for your unique situation. There are a lot of variables to consider and your mortgage broker should give consideration to all of them.
Personally we like to review the rate spread between the current variable and fixed rates and the probability that variable rates may increase or decrease over time. Large spreads may sway us towards variable rates. If the rates are close, the risks associated with selecting a variable rate mortgage may not outweigh the potential cost savings if we are predicting interest rates will increase.