Buying a house can be a giant decision and for some of us the biggest purchase in our lives. Knowing where to live, what kind of house, how big, how many rooms, property size, fixed rates, variable rates, approval processes, renewals and re-mortgaging pre-existing owned houses can all be very stressful, knowing where to start is a great first step.
- Fixed rate mortgage’s have a fixed or pre-determined interest rate on the loan for the duration of the contract. Variable rates float and change depending on the Bank of Canada and over night lending rates. The fixed rate mortgage offers security, dependability and comfort as the monthly payments are the same and do not depend on interest rate fluctuations.
- Although Fixed rates come with higher premiums due to lending risk/uncertainty in the future, they can be dramatically worth the R:R (risk/reward) in the long-term especially in a low-interest rate environment (Z.I.R.P) like present times.
- When interest rates rise the premium paid is offset by the risk of rising variable rates. If you have a variable rate mortgage your monthly interest payments will increase to reflect the interest rate rise on the borrowed capital. If you believe interest rates are going to rise in the next 3-5 years it may be a smart idea locking in a 5 or 10 year fixed rate mortgage.
- Pay raises are not dependable and job changes are frequent, locking in rates in un-dependable times can prove to be very dependable.
- A 10 year fixed rate mortgage would be beneficial based on current rates of roughly 4% depending on the lender. Variable rates are roughly 3% representing a 1% spread for 10 years of interest rate risk. The chances of a 100 point basis point rise (1%) over the next 10 years is likely and some expectations are for 60-70% rate increase over the next 5 years. That would leave variable interest rates roughly at 4.5-5.5% by 2017-2018.
- Knowing your debt obligations with no unexpected surprises helps one to sleep better at night as finance issues can cause serious stress. If housing prices begin to slump in combination with interest rate hikes home owners can be left with “under water” mortgages. This means the value of the mortgage is higher than the value of the home, leading to bankruptcies, lending defaults, and may force an owner to sell, leaving you with a helplessness feeling.
- Yield curves and interest rate charts from previous history can be good indicators and provide positive feedback on possible choices you may make.
Compare competitor rates and meet with a financial advisor if this option is a viable one for you.