In our culture, homeownership is often seen as validation that we’ve made it. What is the “it”? Well that depends on you and what you value. For some, homeownership means the ability to have a family because they can keep a family sheltered and safe. For others, it means financial freedom because, in their golden years, their home will function as part of their retirement savings. For whatever the reason, most people in Ontario want to own their home.
However, homeownership typically comes with a mortgage because most of us do not have $463,882 in the bank, which is the average home price in southern Ontario (Ontario Real Estate Board). A mortgage is defined as “a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt (Webster)”.
The number one issue that most people concern themselves with is the mortgage rate. What is the interest rate? How much are they going to pay in interest for the loan?
Rate is important; don’t get me wrong. But it is not the only thing that makes a good mortgage. And if the rate is not good, you feel you cannot afford a mortgage. Isn’t this what we think?
So let’s look at mortgage rates
Rates can be fixed or variable.
According to Lender Spotlight, a mortgage broker’s portal that allows us to see all the rates the lending companies are offering at this time, the fixed five-year rate is between 2.69 and 3.24 percent.
If you were my client, you would tell me you want the 2.69 percent mortgage rate. Of course, but this mortgage has some pretty severe terms:
- You are locked in for five years. You can get out of it, but the cost would be another down payment on the house. The penalty provisions are huge.
- As much as the lender calls this a fixed mortgage, the rate is reviewed annually, and each year it is set at twenty basis points less than the one-year post rate. So that means if the Bank of Canada raises interest rates, you can expect an increase in your interest rate (I swear the lenders call this a fixed mortgage, although it seems like a variable mortgage).
- The mortgage is not portable, so if you are transferred for work and want to take the mortgage with you, and place it on another property, you cannot. You would be subject to the penalties.
- You have to have a credit score of 715 or higher to qualify.
Does this mortgage suit you? Maybe. I have placed a couple people into it, and they are happy with the lower rate. However, these were people well established in their positions. They have no intention of moving, and they understand they cannot get out of the commitment.
Term of mortgage for a closed mortgage
Should you lock into a mortgage for one, three, or five years, or would you be comfortable with a variable mortgage?
There is no easy answer to this question. Prior to the mortgage rules changing and rates being tremendously low, I often recommended that people lock in with a five-year term because everyone in the mortgage industry knew that interest rates were not going any lower. I had clients lock in for five-year fixed rates at 2.19 percent about eighteen months ago. For the average consumer, rates are now in the 3+ percent range.
I have no crystal ball, but I will say that I expect another rate increase this year as long as the economy stays strong in Canada. My guess is we will see a rate hike in July. However, I could be totally wrong.
When considering a term for a mortgage, it’s important to to consider factors like the penalty if you choose to get out of it early.
There are two common types of penalties: three month’s interest, which is based on your current mortgage balance and interest rate, and interest rate differential (IRD), which is the difference between the interest you promised to pay and what the lender can earn today on a mortgage of your size.
You do have the option of looking at on open mortgage.
You can get a fixed or variable rate.
At this time, a fixed open mortgage has an interest rate of more than 6 percent. This mortgage allows you to pay as much as you want.
This may be a great mortgage for someone who is coming into some money—maybe through inheritance or severance package. This allows a person to pay off his or her mortgage without any penalties when this money comes into fruition.
In a closed mortgage, often you cannot put down a lump sum during the term of your mortgage, or you will be limited to a percentage of the mortgage balance. You may be allowed to put 10 percent of your mortgage balance on the anniversary of your mortgage or increase your payments, but it is often limited.
With an open mortgage, you are unlimited on how much you can put on the mortgage at any given time, but you will pay a premium when it comes to the interest rate.
A good mortgage agent will sit down with you, listen to what your financial goals are and, from there, find you a suitable mortgage.