You’re about to buy your first home — very likely the most expensive purchase you will ever make.
Choosing the right home takes time, analysis and careful consideration. The same should be true of the mortgage you choose.
These days, with mortgage rates still relatively low, it’s tempting to jump into the first mortgage offer that comes your way, but wait: it’s important to keep in mind that the financial climate could change and mortgage rates could be higher when yours comes up for renewal. Here’s what could happen:
You start out with a $300,000 mortgage with a five year fixed-rate of 3 per cent, amortized over 25 years, with a monthly payment of approximately $1,420. After five years, your mortgage will be up for renewal. Even though your mortgage balance will have decreased to $256,425, if fixed rates at that time are higher at 5 per cent, your monthly payment would increase to $1,685; and if rates are at 6 per cent, your monthly payment jumps to $1,826 a month.
That’s a significant increase. Before you commit to any mortgage, carefully assess how much house you can realistically afford today and in the future. Consider how potential income and lifestyle changes, like starting a family or upgrading your home, may affect your ability to cover increases to your mortgage payment along with other ongoing expenses that come with home ownership.
Know your options, decide which mortgage type, fixed, variable or a blended rate, is best for you. Your choice depends on your unique situation.
A fixed-rate mortgage offers the security of a locked-in interest rate for the term you choose, typically five years, and the same mortgage payment for the term — providing peace of mind and predicable budgeting.
A variable-rate mortgage usually offers a lower interest rate than its fixed-rate counterpart but the interest rate is linked to the prime rate which can fluctuate and impact your total interest costs and mortgage payment. Many lenders will allow you to lock a variable-rate mortgage into a fixed-rate mortgage during your term.
A blended rate mortgage is a combination of both fixed and variable rate financing, combining the benefits and risks of each mortgage type.
Lastly, selecting the right mortgage payment frequency is another important consideration. Most lenders offer weekly, bi-weekly, semi-monthly and monthly payment options to accommodate your payroll. Selecting an accelerated bi-weekly or weekly payment frequency can save you thousands in interest costs over the life of your mortgage.
The right mortgage for you will be one that is affordable now and in the future. Get the right advice from your professional advisor to ensure your mortgage fits your personal financial objectives and overall financial plan.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
