Don't make the variable rate mortgage mistake

In the past, mortgage borrowers have typically come out ahead by taking a variable rate mortgage.  However that was then and this is now.  Today’s market is an entirely different situation, making past performance irrelevant.  Right now, the ‘market’ 5 year fixed is between 3.29% and 3.39.    The lowest available 5 year variable is prime -0.25% , which is only 0.54% cheaper.  While this may sound like quite a savings, the difference was always around 1.50% - 2.00% when borrowers typically came out ahead with a variable rate mortgage.   A much narrower gap means elevated risk.  The Bank of Canada makes an interest rate announcement 7 times per year.  They only have to increase the prime rate twice (at 1/4 % each time) for the variable rate to equal the fixed in this example. That doesn’t leave much room for it to play.  We also know that it isn’t going to get any lower than what it is, so the only direction it can move is up.

For those die-hard variable rate seekers, here is what I am going to suggest for you.   Take out a 3 year fixed at 2.99% instead.  This is only 0.24% higher than the variable rate of 2.75%.  The Bank of Canada only has to increase the prime rate a single time for the two rates to be even, and that could come at any time.   At the end of the three year term, chances are that there will be deeper discounts on variable rate mortgages, and a larger gap between fixed and variable rates.  At this time, a variable rate mortgage may once again be the route to go.  In the meantime, this is not only the safest option, but most likely the one that will save you the most money over time as well.

The lowest rate doesn’t always mean the most savings for you.  Make sure you choose a mortgage professional who is going to take the time to put a plan together for you to ensure you are saving the most amount of money over the course of your mortgage, and not someone who will forget about your after your mortgage closes. 

How A Past Bankruptcy Affects Your Mortgage Approval

Just because you have a past bankruptcy, it doesn’t mean that you won’t qualify for a mortgage.   In order to qualify for the lowest market mortgage rates, and a minimal down payment of five per cent, your bankruptcy will have to have been discharged for a minimum period of two years.  CMHC (Canadian Mortgage and Housing Corporation), the leading provider of mortgage default insurance in Canada, also requires two re-established credit lines.  These can come in the form of a credit card, a car loan, a bank loan, or a line of credit from a bank.  These two credit lines need to have been established for a minimum period of one year, which doesn’t have to come after the two years of re-established credit. 

Not all credit lines are created equally, so it would be ideal to have at least one of them as a revolving credit account, such as a credit card or a line of credit.   These credit lines must have a minimum credit limit of $1,500 in order for them to qualify as sufficient enough for credit re-establishment for a mortgage in Toronto.   If you are able to set these limits over $2,000, then it will help your case even more so. 

So what happens if your bankruptcy has been discharged for less than two years?   It doesn’t mean that you can’t get approved for a mortgage, it just means that you will need to have a larger down payment and you will pay a higher rate.   How much more?  Typically a minimum down payment of 15-20% would be required in this particular case.   The mortgage term should be kept shorter as well for a couple of reasons.  The first would be to keep the rate as low as possible.   Shorter term mortgages carry lower interest rates.   Typically, these mortgages will be placed with an equity type lender, which is a lender that lends based on the ‘equity’ in the home, more so then on your credit.   You can expect to pay about 1% higher, give or take, on a one to two year term with an equity lender over the discounted five year fixed rate with an ‘A’ type lender, such as a bank.

The second reason for keeping the mortgage term as short as possible is that you will most likely want to refinance with an ‘A’ type lender at the time of your mortgage renewal in order to lock into a lower interest rate for a longer period of time, in order to keep your interest costs as low as possible.  It is best to discuss all these points with your mortgage broker to ensure that he or she understands your situation and puts a plan together to maximize your savings over time.

Bankruptcies sometimes happen to good people, and it certainly isn’t the end of the world.   It is good to know that there are options open to when seeking a mortgage after a bankruptcy.   

Is a 10 year mortgage term a good idea?

With 10 year mortgage terms now available for as low as 3.89%, they are now starting to catch the attention of many mortgage seekers.  But is taking out a mortgage for 10 years a good idea?   The answer is yes and no.  I really depends on the person borrowing the money.  For some, it will make sense, but for most it won't. 

One thing is for certain....mortgage rates won't always be this low.  We know they are going to go up as the economy improves.  In a healthy economy, 5 year fixed mortgage rates commonly fall between 5-6%.  Will someone save more money over a 10 year period if they take out a 10 year mortgage?  While anything can happen, it is a reasonably safe expectation that 5 year fixed mortgage rates will be higher in 5 years than they are today.  IF you stick with the 10 year mortgage for the entire 10 years, than the answer is yes, you will most likely save more money over that period in a typical situation.  But that is a very big 'IF', as 10 years is a long time, and we really don't know what our situation is going to be like down the road. 

Many people refinance their mortgage about 3 - 4 years into it, breaking their 5 year term early.  Why do they do this?  It could be to get a lower mortgage rate (unlikely in the future, as we are already rock bottom on rates).  It could be to withdraw money from the equity in their home for whatever reason, which is probably the most common reason for refinancing.  Maybe you choose to move and refinance at that time (although, MOST mortgages are portable and you can move your mortgage to your new home). 

My point is that the future is not set, and we cannot predict it.  Maybe 4 years from now you decide to start a new business and need to borrow money against your home? Or you decide to go back to school?  Or you need money for medical purposes not covered by insurance?   Maybe your employment gets transfered to another province or country and your mortgage can't be ported?  My point is, there are numerous curves life can throw at you that are unexpected.   After all, if homeowners thought they would need to refinance in 3-4 years, then they wouldn't have taken a 5 year mortgage to begin with.  

Life has unexpected changes.  I am not 'against' 10 year mortgages, but just make sure your mortgage broker or mortgage banker takes the time to explain the pitfalls, and doesn't just drop you into the mortgage term that makes them the most money (10 years).