No Worries, Go Fixed - By Michael Sjerven (March 2009)
With all the media hype these days, it’s no wonder that most people look surprised when I tell them I’m a mortgage broker. The average person hears about the credit crunch in the US and assumes we’ve had a major impact here in Canada. In reality, we have lost many sub-prime lenders over the past year and are facing tightening credit now, but for most people not much has changed. In fact, now more than ever, is a great time to “lock” into a mortgage. Getting mortgages funded is not an easy job, and could be compared to being on a battlefield. It takes creativity, hard work and persistence to get the deals done. It’s important to let a mortgage professional handle your mortgage with care.
Rates are at historic lows and money is still readily available for the majority of Canada’s population. House prices are also coming down, and have already dropped over 10% in BC. It is now a buyers’ market and many first-time home shoppers are taking advantage of more appealing prices, and lower interest costs/payments. Moving into your dream home is a reality worth pursuing. Essentially, if you want to get a great mortgage, your chances are strong. Keep in mind the two biggest things lenders look at is your income (or business) and credit score – if these are solid, then the rest is easy. If your credit is not in great condition (below 600), expect to pay a higher interest rate.
Although bank prime is now at 2.5%, it is my opinion that fixed rates are currently the best option. If you want to go variable, expect to pay close to 1% over prime (or 3.5% ) at this time. Though the variable option looks good now, when the Bank of Canada begins hiking rates, you’ll see your interest rate and monthly payments increase along with it. If you go with a fixed rate, you can take advantage of 3- or 5-year terms, from 3.99-4.29% and be guaranteed this rate for the entire term. Why risk paying more in the long run to save only a few bucks now? The economy will eventually turn around and inflation will kick in – with rates back on the rise.
Yes, it’s true that the economy is having a rough go and 2009 will be a challenging year, but with every downturn comes great opportunities for those with a few dollars to invest. Much like the last 7-year boom, I think we’ll see a lot of money made when the recession turns around after 2010. So my advice for the next couple of years is to buy a home, some Apple shares for good measure, and relax... the best is yet to come!
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Have you considered refinancing to pay off debt?
With the high cost of holiday gift-buying and entertaining now behind you, this may be the perfect time to get the New Year off to a fresh start by refinancing your mortgage and freeing up some money to pay off that high-interest credit card debt.
By talking to mortgage professional, you may find that taking equity out of your home to pay off high-interest debt associated with credit card balances can put more money in your bank account each month.
And since interest rates are at a 40-year low, switching to a lower rate may save you a lot of money – possibly thousands of dollars per year.
There are penalties for paying your mortgage loan out prior to renewal, but these could be offset by the extra money you could acquire through a refinance.
With access to more money, you will be better able to manage your debt. Refinancing your first mortgage and taking some existing equity out could also enable you to make investments, go on vacation, do some renovations or even invest in your children’s education.
Keep in mind, however, that by refinancing you may extend the time it will take to pay off your mortgage. That said, there are many ways to pay down your mortgage sooner to save you thousands of dollars. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
If homeowners fail to take the time to thoroughly research their options through a mortgage professional and, instead, simply sign renewal offers received from their bank, credit union or other lender, they could end up paying thousands of dollars more per year in interest. Simply by shopping your mortgage with a qualified mortgage professional, you can access the banks as well as other lenders that you may not have considered, but which can often offer interest rate specials or other attractive terms.
In the current credit-crunched lending environment, now more than ever it’s important to take the time to contact a mortgage broker to find out your options.
By refinancing now and paying off your debt, you can put yourself and your family in a better financial position. It’s very important to not rack up your credit cards after refinancing, however, so set your goals and budgets, and stick to them!
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Great opportunity for first-time homebuyers
If you’ve been thinking about purchasing your first home, but haven’t yet made up your mind, now is an ideal time to think about taking the plunge into homeownership. Since Canada’s currently in a buyers’ real estate market and interest rates have been dropping to historic lows as of late, now is the perfect time to consider your mortgage options.
Your first step in the home-buying process should be to talk to a licensed mortgage professional. These experts have access to a vast array of lenders – up to 90+ institutions, including big banks, credit unions and trust companies – which enables these professionals to negotiate the best possible mortgage products and rates on your behalf. In comparison, if you approach your bank with a mortgage request, they can only offer you a narrow choice – namely, their own products.
Mortgage professionals can get you pre-approved for a mortgage so that you know how much you can afford to spend on a home before you start shopping.
And thanks to the latest federal budget, there are a couple more reasons why now is the optimal time to purchase your first home.
First, the budget proposes a $5,000 increase to the RRSP Home Buyers’ Plan, meaning first-time homebuyers can now withdraw up to $25,000 from their RRSPs for a down payment – tax- and interest-free.
The budget also proposes a $750 tax credit for first-time homebuyers to help with closing costs, such as legal fees, disbursements and land transfer taxes.
The tax credit is based on an amount of $5,000 for first-time homebuyers who acquire a qualifying home after January 27, 2009 (ie, the closing is after that date).
An individual will be considered a first-time homebuyer if neither the individual nor the individual’s spouse or common-law partner owned and lived in another home in the calendar year of the home purchase or in any of the four preceding calendar years.
If you’re thinking of buying your first home, Dominion Lending Centres mortgage professionals can answer all of your mortgage-related questions
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Tips for Paying Off Your Mortgage Faster
Mortgages in Canada are generally amortized between 25 and 35 year terms. While this seems a long time, it does not have to take anyone that long to pay off their mortgage if they choose to do so in a shorter period of time.
With a little bit of thinking ahead, and a small bit of sacrifice, most people can manage to pay off their mortgage in a much shorter period of time by taking positive steps such as:
- Making mortgage payments each week, or even every other week. Both options lower your interest paid over the term of your mortgage and can result in the equivalent of an extra month’s mortgage payment each year. Paying your mortgage in this way can take your mortgage from 25 years down to 21.
- When your income increases, increase the amount of your mortgage payments. Let’s say you get a 5% raise each year at work. If you put that extra 5% of your income into your mortgage, your mortgage balance will drop much faster without feeling like you are changing your spending habits.
- Mortgage lenders will also allow you to make extra payments on your mortgage balance each year. Just about everyone finds themselves with money they were not expecting at some point or another. Maybe you inherited some money from a distant relative or you received a nice holiday bonus at work. Apply this money to your mortgage lender as a lump-sum payment towards your mortgage and watch the results. By applying these strategies consistently over time, you will save money, pay less interest and pay off your mortgage years earlier!