I could confidently say that most home owners/first time home buyers compare mortgage rates solely on the scale or the ‘lowest rate’ and neglect to factor in their long term strategy/goals. When you compare mortgage rates, you must factor in the important variables such as the length of time you plan on living there, the purpose of the purchase, the flexibility of the terms and conditions, prepayment privileges, etc.
At this present moment, rates are lower than they’ve been in years, and everyone is being bombarded with advertising the major banks that gets them number crazy! If it’s not on TV it’s on the radio or giant billboards on the Gardiner Expressway. How will someone who doesn’t work in the industry know how to compare mortgage rates without choosing the wrong one? And trust me; the lowest rate isn’t always the right one! Often times, borrowers find this out a little too late.
Answering these questions will be a good start in helping you compare mortgage rates effectively:
- How long will you be living in/own this property? – If less than 5 years, consider a lesser term even if the rate is slightly higher). It will avoid hefty penalties at the time of breaking the mortgage. A term less than 5 years will give you the flexibility of exploring options at the time of expiry.
- Will this be an owner occupied or rental unit? – Rentals usually involve a rate premium added to the advertised rates. (Don’t automatically decide to buy as an ‘owner occupied’ residence just to save on the rate) What happens of you decide shortly after to buy a home to live in as well but have already purchased a property as an owner occupied?
- Do you want a variable rate or fixed rate? – Consider variable or fixed not solely on the lower of the two options, but also consider your circumstances. Will your pay increase or decrease in the years to come? Will there be a job change? Are funds tight, and will you be able to afford a mortgage at a higher rate should rates increase under the variable option? Is there speculation on a rate increase from the Bank of Canada?
- Which rate comes with a term that offers the most flexibility? – Not all rates have the same terms and conditions. Terms and conditions are important to read and understand. Perhaps one option has restrictions that the other does not, but the focus is primarily on the lower rate so it ends up getting overlooked. Terms and conditions to look out for are; potential sale of the property, pre-payment options, default and penalties, etc.
- Monthly payment – If you’re stuck making a decision between 2 types of rates which are very close, yet one is a little lower… work out the payments! Rates are visually appealing but the payment is what really matter. You might be surprised to see that the difference in the payment is not very significant at all. Go with your gut and make a decision you are comfortable with, even if it costs a few dollars more.
This is the proper way to compare mortgage rates. Most people in the industry won’t share this information because once again, the rate becomes the most appealing factor in making the decision. To compare mortgage rates to this degree is time consuming and may sound confusing, but it will almost certainly bring awareness to your decision making process that will ensure a confident decision.
We put in this extra effort because we care about our clients and take pride in the information we provide to them. There’s much more information and knowledge to share, so make sure to ask us anything you need to know! We’re happy to help.