Choosing the right mortgage is as important as choosing the right place to live. It has to work with the Buyer's lifestyle and fit into his financial future. When selecting a mortgage, the Buyer shall ask himself important questions:

1. What’s his tolerance for risk?

2. How long does he plan to live in this home?

3. How big is his down payment? 

4. Does he anticipate any more big purchases or life events over the next five years? 

Variable rate mortgages are associated directly to a commercial bank’s prime rate. This means they can fluctuate over the course of your term. Prime is set in accordance to the Bank of Canada’s overnight lending rate. This is the rate the central bank charges commercial banks when it lends money.  When the central bank raises rates, commercial banks raise prime to reflect their higher cost of borrowing. 

 Fixed rate mortgages are linked closely to the bond market. Bonds are debts with a promise to repay the principal, with interest.  At the time the mortgage agreement starts your rate is locked in and remains the same for the term, just like the bond.  The minimum payments never increase and your client knows exactly how much they will owe at the end.  

 When a variable rate suits to the Buyer

 If the Buyer can manage risk he should consider a variable rate mortgage. Historically this has saved more money on interest than a fixed rate.  But, with interest rates near historic lows they’re expected to climb in the future and the Buyer needs to be protected.  In the case the Buyer decides on a variable mortgage, it would be wise to make larger payments. This also means more money is going directly towards principal every month, shortening the amortization.

 When a fixed rate suits to the Buyer

 If the Buyer plans to live in home for the long term, taking a fixed rate mortgage will help him better plan.  A lengthy amortization means the Buyer can focus on a fixed month-to-month budget and not worry about short-term fluctuations.  If the Buyer is putting the minimum down payment on a new home he is starting off with very little equity and a great deal of risk.  The Buyer can minimize that risk with a fixed rate mortgage. He won’t be worried about rates rising and their payments increasing.

Look Ahead

It’s a good idea to have a five-year horizon.  Ask yourself if you’re planning to buy a new car, getting married or having a baby. All these changes can dramatically affect your ability to pay bills. 

(Courtesy of Mortgage Alliance AKAL Mortgages)

If you'd like more information, or if you have a question that's not covered here, please ask me — I'll be happy to help.