You can save thousands, if not tens of thousands of dollars on a mortgage if you choose the right loan strategy (prêts hypothécaires). Even on a $100,000 mortgage, the savings can be considerable.
So the real question is what should I be doing besides looking at interest rates?
How do you choose the right loan strategy to suit your situation? That’s simple. Consult a mortgage broker (prêts hypothécaires) who is able to analyze all of the options available and make the right recommendation for you. Why do you need an expert for this?
- We don’t know what interest rates are going to do, go up, down or stay in a narrow range.
- We don’t know enough about economic situation and its impact on interest rates.
- Each borrower needs a strategy designed for him alone, since each of us has our own needs and long range plans.
In order to be able to address these issues, you have to have the experience and knowledge to be able to examine all of the options available. Only a experienced mortgage professional is able to do that.
No one can help you choose the mortgage strategy for you unless he has excellent knowledge of each mortgage strategy that is available (both the positive points and the bad points), can calculate where you stand in the interest rate cycle and can make an educated guess about the interest rate movements over the next decade.
Volumes and volumes have been written about interest rates, interest rate cycles and the economic climate in general and it is a complex subject. A basic synopsis of historic interest rates is as follows:
-There was a general upward trend in interest rates between 1950 and 1980.
-There was a general downward trend in interest rates between 1982 and 2003.
-Interest rates have remained fairly flat from 2003 to 2006.
If you didn’t understand that interest rates trend, you would not have been able to design successful interest rate strategies. Designing an interest rate strategy meant for falling interest rates when the rates are trending upward will spell disaster.
In order to understand and work with these trends, two economic rules need to be applied:
1. Interest rates typically follow the inflation rate. This means that if we see the CPI (Consumer Price Index) go up, we can expect an increase in interest rates.
2. Interest rates reflect the health of the economy. In a robust economy, interest rates will be higher because there is more demand for money, and when the economy is less strong, interest rates will be lower.
We cannot predict interest rates with any degree of accuracy, but we know that interest rates over the last thirty years were averaging 9.6%, while they are now around 5%. (pour un prêt hypothécaire)
What are the different strategies?
There are several basic strategies, each possibly consisting of several options, and it is often advantageous to combine two strategies to take advantage of the market.
All this to say that you really need to consult an accredited mortgage professional.
The basic mortgage strategies:
• 5 times 5 – renew a mortgage five times with a fixed term of five years.
• Long-term – a fixed-rate mortgage for 15, 18, or 25 years.
• Variable rate – mortgage whose rate changes with the base rate of the Bank of Canada.
• ‘Smith Maneuver’ and the cash flow dam – a strategy that allows you to eventually deduct interest paid on a private house from your personal taxes (salaried or self-employed worker).
• More retirement – an efficient manner of using the equity in your home to supplement retirement income.
• No down payment – This strategy allows one to estimate the savings and buy right away without a down payment, rather than rent an apartment while you accumulate the minimum down payment of 5%.
• Less than perfect credit – help repair a poor credit rating in order to obtain an excellent rate in the future.
By comparing these strategies you will learn to appreciate what a good mortgage strategy (pret hypothecaire) can do, and enjoy savings over the entire life of your mortgage.
Don’t forget that a good strategy is 21 times more valuable than simply negotiating the best interest rate.
Each strategy deserves its own personal analysis and should be coupled with your long-term objectives and the current state of the Canadian economy.
How to choose the strategy that is best for you?
I advise you to contact a professional in mortgage planning to establish a personalized strategy. It’s free and … enriching
