IT PAYS TO REVIEW THE MORTGAGE BASICS
Choosing the right mortgage ismore than just a numbers game, says Barry Gollom, vice-president, mortgages and lending at CIBC.
“Of course, rates and terms are important,” he says. “However, it’s essential to view your mortgage as one component of your overall financial plan. Often there are a lot of things people don’t consider in the heat of themoment.”
Mortgages offer a variety of features and finding the one that best fits your needs begins with answering a few simple questions.
The first question to consider as a homebuyer is how comfortable you are with the potential for interest rate fluctuations. This will determine if a fixed- or variable-rate mortgage is the best fit.
In a fixed-rate mortgage, the interest rate and mortgage payment do not fluctuate during the mortgage term. A variable-rate mortgage, on theother hand, means interest rates will change with the banks’ prime rate. While mortgage payments stay the same, the percentage that goes towards the principal can vary.
A person’s stage of life can be another factor when it comes to deciding whether to go for a fixed-or variable-rate mortgage. A new homebuyer with a larger mortgage might be more sensitive to rate changes, while an existing homeowner renewing a smaller mortgage may prefer a variable rate.
The mortgage term is another consideration. A short-term mortgage generally offers a lower interest rate than a longer-term one. This can be an attractive option if a person feels interest rates will drop, plans to sell their home, or is looking to pay off their mortgage early.
Long-term mortgages generally carry a higher interest rate, but they allow buyers to secure an interest rate over a longer period of time.
“In light of the current low-rate environment, there is certainly a case to be made for a longer-term fixed- rate mortgage,” Gollom notes. “Given you are locking in at relatively low rates, you may have an opportunity to make extra payments over that time.”
The debate about short- versus long-term mortgages often comes down to comfort level, head ds. “You have to ask yourself how you will sleep at night. The longer you lock in a rate, the less you have to think about that. Longer terms can bring considerable peace of mind if fluctuating rates worry you. And if you’re thinking of moving in a few years, you might have the opportunity to port your existing mortgage.”
“Pre payment terms should also be part of the mortgage discussion and are very important,” Gollom says.
Pre payments allow home owners to make lumpsum payments at certain intervals. An open mortgage can be prepaid in part or in full during the term of the mortgage with out paying a prepayment charge. However, the interest rate is typically higher than for a closed mortgage.
A closed mortgage cannot be renegotiated or refinanced before the end of the term without paying a prepayment charge. Most closed mortgages however do include certain prepayment privileges (e.g. 10 per cent of the original principal each year) and the client won’t incur any charges.
It’s also important to remember that a decision made today does not mean the person is committed to the same terms for the entire mortgage. “You can alter your strategy as your financial needs change over the course of your mortgage,” Gollom says. As circumstances change, homeowners can always revisit their mortgage terms at renewal time and explore available options to reduce amortization or accelerate payments.
The ultimate decision comes down to how you want to live your life, Gollom says. “When you first take on a mortgage, you need to ask yourself how your mortgage payment fits with yourlife, not how you can fit your life into your mortgage payment.”
THIS STORY WAS PRODUCED BY POSTMEDIA WORKS ON BEHALF OF CIBC FOR COMMERCIAL PURPOSES. POSTMEDIA’S EDITORIAL DEPARTMENTS HAD NO INVOLVEMENT IN THE CREATION OF THIS CONTENT.