Make sure you choose the right home loan strategy for you. You will be amazedat how much you will save if you concentrate on the right mortgage strategy, rather than concentrating on finding the lowest interest rate. Differences in interest rates are peanuts compared to the tens of thousands of dollars you will save with the right mortgage strategy. (Read How to beat the best rate! to see how this works.)
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 what interest rates are going to do in Canada. Second, you have to fully understand 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 specialist.
You see, a professional mortgage consultant has the ability to conduct an in-depth analysis of the many options that may or may not suit you. To do this, he has been trained in understanding all of the mortgage products available and to choose which one is right in a given situation. In addition, he knows where we are in an interest rate cycle and he can evaluate of the probable movement of interest rates over the next ten to fifteen years.
Thousands of papers and hundreds of books have been written about the movement of interest rates. But for a basic understanding you need to know the three scenarios that interest rates can take and the two rules that interest rates follow.
Scenario One: Interest rates rise, as they did from 1950 to 1980.
Scenario Two: Interest rates decline, as they did from 1982 to 2003.
Scenario Three: Interest rates remain stable, as they have from 2003 to 2006.
To work with these trends is important, since, if you use the wrong mortgage strategy (for example one designed for falling rates, and then rates go up), you will be paying way too much for your home loan.
Next, you have to understand the rules of interest rates:
Interest rates reflect inflation. If there is an increase in the consumer price index, interest rates should increase.
Interest rates are tied to a country’s economic performance. A strong economy will mean increased interest rates, since there is a higher demand for money, and a weaker economy will mean decreased interest rates, since the demand for money will go down. It is also important to understand the rules of interest rates. Interest rates follow two rules, one, that interest rates are reflections 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.)
The exact prediction of interest rates is next to impossible. We have seen interest rates increase over the last thirty years, with the average rate being 9.25%. Today, however, it is at about 5%. Perhaps at this interest rate level, you think it would be wisea good idea to consider a 5 year fixed mortgage. But if you had done that over the recent historic period, it would have been a disaster.
Mortgage brokers 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.
Here are the basic mortgage strategies:
*5 times 5-A fixed term five year mortgage, renewed 5 times.
*Long term-a fixed rate mortgage for 15, 20 or 25 years.
*Variable rate-a mortgage with an interest rate that changes based on the Bank of Canada base rate.
*Smith Maneuver-the borrower can deduct mortgage interest from income tax.
*More retirement-the equity built up in a home is used to create retirement income.
*No down payment-calculate the cost of renting while saving for a down payment as compared to taking a larger loan.
*Less than perfect credit-use a loan to repair credit so a mortgage will be cheaper later.
Using the correct one of these strategies in each borrower’s case is what it is all about. Using the right strategy is 21 times more important than getting a better interest rate.
Your mortgage broker will explain each of these strategies and review if and how they would work in your own circumstances. He is also able to gauge the economic environment to help you make the right decision. If you want to choose the best mortgage strategy, make it your strategy to meet with a mortgage broker. A meeting that costs nothing may end up saving you thousands.
