As interest rates remain in historically low territory there are a number of attractive options for those looking to enter the housing market or renew their mortgage.
With an increasing number of low-rate, no-frills mortgages promotions, one local advisor is suggesting that those shopping for a mortgage keep in mind that cheapest isn’t always the best.
Paul Macara, a mortgage broker with Invis-Beyer Mortgage Services, said although shoppers will take many things into consideration before making a purchase, many believe the lowest rate is the only factor in choosing a mortgage.
“Who really knows what life might be like a few years down the road?” asked Macara. “The lack of flexibility associated with a no-frills mortgage could end up causing you some major headaches and costing you more in the long run.”
He said those shopping for a mortgage need to take a number of factors into consideration, pointing to refinancing penalties, fixed of variable rates, term length, pre-payment options, payment flexibility, restrictions, fees and portability.
“An amazing cut-rate mortgage could have you locked into a very rigid contract filled with financial trip lines that could work against you down the road. That’s why it’s important to check the fine print,” said Macara.
While in general Macara likes the security that comes with a five-year rate, he said a variable rate has its benefits, “as long as you’re willing to live with the risk.” He said a variable rate would not be the best option for someone on a fixed income.
He said most homeowners should expect to pay a penalty if they want to break their mortgage to get a better rate or for a complete refinance. Many in five-year fixed mortgages will look to break the mortgage during the third year for debt consolidation or to accommodate changing circumstances.
“Some no-frills mortgages come with larger than your typical IRD [interest rate differential] penalties. It is important to understand how your penalty will be calculated before signing.”
Macara said knowing whether it’s worth it to break a mortgage is simply a matter of doing the math, a calculation he’s more than happy to provide for his clients.
He also suggests looking over the prepayment options that will allow you to chip away at the principal to reduce the overall cost.
“I always encourage my clients to try to take advantage of prepayments each year as these go directly to the principal,” said the Oak Bay-raised Macara.
He said a maximum 25-year amortization can take away flexibility that may be needed later, with many homeowners choosing a 30-year amortization but setting their payments to the higher amortization period. This gives them the option to reduce their payments should an emergency arise or situations change.
“For first-time buyers too, a 25-year amortization means higher payments than a 30-year amortization and could limit their entry into the market,” he said.
Marcara suggests speaking with a mortgage broker or other financial advisor before jumping at the lowest rate you can find.
“We’ll always help you find the right combination of low rate with the options you need to achieve your goals for homeownership and the financial future you want.”