Wednesday, December 13, 2017 20:41

In Today’s Market Focus Long Term

interest rate

Right now is probably the best time EVER to get a mortgage in Canada.

The past week has seen the financial markets rocked and investors have flocked to safe haven investments like the Canadian Bond. As a result Bond Yields have tanked  and fixed rate mortgages are, or should soon reach lows that may have only been paralleled at the height of the recession 2 years ago.

Add to this that the Overnight Index Swaps (OIS)  which predict the future moves that the Bank of Canada will make are now predicting a 100% chance of a decrease to the overnight rate by years end!

What this means for the consumer is that the prediction of investors is that Prime will DECREASE this year.

So take your pick.  Do you like a fixed rate in the low three percent range or a variable rate currently at 2.20% which might go lower this year?

If you have a higher level of risk tolerance and don’t mind a fluctuating payment and rate then go with a variable right now. Better yet, set your payments to 4 or 5 percent if you can and pay off a bunch of principle before your rate increases in the next several years.

If you like the safety and comfort of fixed rates then go that route. The 5 year fixed is almost 2 percent below the historic average.

There is no right or wrong in today’s mortgage market.

This leads to a larger issue. If you are following mortgage rates then you must learn to also focus on the long term.

Three months ago the buzz was that the Prime Rate would probably increase in September at the Bank of Canada meeting. Then last month the talks shifted to it being unlikely that Prime would increase this year at all. Now as of August we might se a decrease in Prime.

Instead of trying to figure out the next 6 months focus on the longer term. Instead of worrying about fluctuations in the next several months plan for the future and use these amazingly low rates to prepay your mortgage faster.

If you are buying a new home don’t worry so much about today’s rate, instead have your mortgage broker show you what you might be paying in 3, 4, or 5 years when your term is up.

I always show my clients what they could be paying on their mega home when rates return to normal. Its all the more reason to take advantage of low rates today, not by borrowing more, but by paying more!

I know it’s a crazy concept but paying more now will help you when interest rates come back to normal.

If you have a $300,000 mortgage amortized over 25 years at 3.5% you would expect to pay $48,708 in interest over the first 5 years and $41,159 in principle.

Now if you were to increase your payment by $200 a month to $1697 you would pay off an additional $13085 in Principle over the 5 year term!

Maybe $200 a month seems like a lot to add to your mortgage payment.

Look at it this way; if rates were still 5.5%, like they have been around historically, your payment on the $300,000 mortgage would be $1831, which is $134 more each month than you are paying in this scenario.

The bottom line is interest rates are very good right now. It is an excellent time to get a mortgage. Remember though that they won’t stay low forever and having a solid mortgage plan in place that takes advantage of these rates will help you long term.

 

John Shearer
Mortgage Broker