Time to lock in mortgage?

With the Bank of Canada raising its key interest rate again last week you may be wondering if you should now lock-in your variable rate mortgage.

There is lots of chatter in the media about the rate increasing again over the next year up to another four times, so you may have some concerns.

The first question you should ask yourself is why you chose a variable rate mortgage in the first place.

Was it because it had a lower rate than a fixed term mortgage or did you have a plan to take advantage of that lower interest rate?

Historically, a variable rate has been a better option by just comparing rates, but those rates can change.

Potentially and depending on whether you have a variable rate mortgage or an adjustable rate mortgage, more of your payment will be going toward interest rather than principal if your payment isn’t adjusting accordingly as rates increase.

Another important consideration with variable rate mortgages is that they have lower prepayment penalties generally than a fixed rate mortgage should you decide to break your mortgage early.

Statistics support that this happens more often than not.

Instead of trying to guess where rates are headed, consumers would do better to think about their own situation. They should evaluate their personal balance sheets and risk tolerance.

The decision of whether to go short (variable) or long (fixed) will depend on the consumers’ tolerance for risk as well as their ability to withstand increases in mortgage payments.

You need a plan with a variable rate mortgage. The best thing is to do a review with a mortgage professional to determine your personal tolerance to rate increases and determine a strategy for managing your mortgage to reduce your overall cost of borrowing.

Something to consider about locking in your mortgage is that not all lenders are going to offer you the very best fixed rates. You are also hedging your bet that at some point. your fixed rate is going to be lower than a variable rate mortgage.

No one can predict where rates are headed; even the experts get it wrong. You decision to lock-in to a fixed rate mortgage should not be based on what you read in the media.

If you are at your maximum purchasing power or you’re a worrywart, lock-in, forget about it, and enjoy life.

If you would like a no obligation review and financial analysis for your personal situation please let me know.

We can compare your current variable rate mortgage to a fixed term option and even compare it to another variable rate mortgage that might have a deeper discount.

That way you can make an informed decision as to whether locking in is the best option for you.

Car versus house

You may not have ever thought that you would have to make a choice, but the reality today is that you may have to choose – a new car or a new home.

Many first-time homebuyers are finding out the hard way that they have now have to decide between the two.

We all love the smell and prestige of a new vehicle, but the attached monthly payment may prevent you from qualifying for mortgage financing.

If you are thinking about purchasing a home, but also have thoughts of buying a new vehicle, the reality is that you may have to make a choice or at the very least do some planning ahead if you are serious about owning a home of your own or moving up.

A zero interest rate car loan might sound like a great idea but don’t be tempted by the long term, low interest loans available on new vehicles.

A $500 monthly car payment will reduce the amount of mortgage you can qualify for by approximately $100,000 based on today’s interest rates.

I see many new vehicle payments into the $600-$900 a month range so we can see how these high payments can affect your ability to qualify for mortgage financing.

Mortgage lenders use two different ratios to determine how much you can borrow to purchase a home. They compare your total monthly housing costs (GDS) and your overall total obligations (TDS) as a percentage of your total monthly gross income.

If your total debt service ratio is too high with your vehicle payment then you may not qualify for mortgage financing or it may restrict your budget to the point that you can’t purchase the home of your dreams because your budget is too small for the market where you live.

It doesn’t matter whether it is a lease payment or a loan payment as either are included in your monthly obligations for debt servicing.

Self-employed? Ensure that all the payments are managed through the corporate bank account as this can help when it comes time to qualify for a mortgage.

Shopping for a new vehicle can also hurt your credit score which is an important component of qualifying for mortgage financing.

Every time you sit down with the business manager at a car dealership, with your written consent, they will check your credit in order to advise on what vehicle loan options might be available to you.

These multiple credit inquiries over a period of time can lower your credit score and may affect your ability to qualify for a mortgage.

Everyone is tempted by new vehicles but buying used or waiting until after you make your home purchase may be prudent if you are serious about home ownership.

Sometimes it’s hard to have both. Think about your financial future and if buying a home in the next few years is in your plans please check your budget to ensure you can still accomplish your goal of home ownership.

Holding off on the new car or buying a good condition older vehicle might be the better plan. It’s hard to have a big car payment and a mortgage payment at the same time.

Reverse mortgage tips

Probably the most common way to utilize a reverse mortgage is to pay off debt or a mortgage while supplementing your retirement income, but there are many other ways a reverse mortgage can be used to assist you financially.

You may not be sure how a reverse mortgage could assist you but here’s some different financial ways you might use one.

The funds do not necessarily have to be used by the homeowner, but could be used to assist a family member.

  • Help Family With a Home Purchase – Parents assisting their children with down payment funds to purchase a home has become very common given some of our hot and expensive housing markets. With a reverse mortgage you could access the equity in your home to provide the down payment funds without having to tap into any savings or investments that you have set aside.
  • Eliminate Your Current Mortgage Payments – If there is sufficient equity in your home, the funds from a reverse mortgage can be used to pay off your current mortgage and free up monthly cash flow. This could prevent you from having to downsize in retirement and leaves you a possible option of staying in your current home.
  • Purchase a Home – A reverse mortgage can be used the same way as a regular mortgage to purchase a home. You must have a minimum 45 per cent down payment as the maximum amount available is 55 per cent of the home’s appraised value based on your age, type and location of the property.
  • See the World – Have you always dreamed of travelling when you retired, but you haven’t been able to set aside sufficient savings? If you have untapped equity in your home, then a reverse mortgage could be the way to realize your retirement dreams of travelling.
  • Renovate Your Home – As we age, mobility and safety issues in the home can become a concern. Funds from a reverse mortgage can make the necessary changes to ensure that your home is safe so you can remain in your own home safely.
  • Cover Monthly Expenses – If your retirement income isn’t sufficient to cover your monthly expenses, then a reverse mortgage can assist in supplementing your current pension income without any tax consequences and with no negative consequences to your current income.

Reverse mortgages can be used in many ways:

  • eliminating financial hardship
  • paying off high interest credit card debt
  • providing funds for medical emergencies
  • supplementing pension income
  • assisting you with a comfortable retirement.

If you have questions about whether a reverse mortgage is or isn’t the right choice for you, please give me a call and we will reviews all of the potential options available that might assist with your personal circumstances.

Path to mortgage freedom

We all have mortgage freedom until we buy our first home unless we are lucky enough to have the cash to purchase without the financing assistance of a mortgage lender.

We all know that when we buy our first home that it will be decades before we have mortgage freedom again.

So what is mortgage freedom?

Is it the day that you make your final mortgage payment and get to have a mortgage-burning party? The definition needs to be expanded beyond that thought..

My definition of mortgage freedom is not only being able to retire mortgage free or have the ability to be mortgage free, but to also have a source of income that will support the lifestyle you have become accustomed to.

Do you know how much you will need to enjoy a comfortable retirement?

Does it seem unattainable?

Most Canadians have no idea what this number should be and, unfortunately, most are not even thinking about their retirement plan or how important a role your mortgage plays in your retirement wealth.

Canadians are retiring earlier than ever before at an average age of 59, yet the average life expectancy is 84 for men and age 87 for women.

Here are some alarming statistics from some recent surveys regarding retiring Canadians and their debt.

  • A recent Sun Life Financial survey found that a quarter of retired Canadians are in debt in their golden years. About 25 per cent of the Canadians polled between the ages of 55-80 years for the Sun Life Financial Barometer said they have debt that ranges from mortgages to car payments.​
  • According to a study by Bankruptcy Trustees Hoyes Michalos, “Pre-retirement” Canadians aged 50-59 are taking on an alarming amount of debt and are most at risk of bankruptcy, according to a study that examined some 7,000 insolvency filings.
  • Boomers are about $400,000 short of their financial goals in retirement according to a BMO wealth study.

So how does the above information relate to your mortgage?

When you obtain a mortgage, it is most likely the largest financial transaction of your life.

Here’s a thought for you. Instead of focusing solely on the interest rate, perhaps it might be important to consider various strategies that you can utilize within your mortgage that will assist you with your goal of mortgage freedom and financial freedom when you are ready to retire which includes your overall cost of borrowing.

The interest rate is important, but it’s not the most important factor to consider when choosing a mortgage product.

Having the same mortgage strategy your entire life is not always the best financial decision. If you are applying different mortgage strategies at different stages of your life, just like your other investments, it can lead to the financial wealth and the independence you are hoping for in retirement.

Your mortgage is the financial tool that is tied to your largest asset so whether you decide to pay off your mortgage early or keep your other investments liquid, having a strategy and utilizing your mortgage like the financial tool that it really is can help you have the retirement that you desire.

Ask yourself these questions –

  • Do you manage your mortgage?
  • Do you manage your Equity? Or do you just leave everything alone for the next 25 years and hope all will work out for the best?

Whether you are refinancing or buying a home, you should not be walking away from your bank or mortgage broker without a strategy in place to accomplish your goals not only for the short term, but also for the long term and it shouldn’t look the same through every phase of your mortgage life.

If you answered no to one or both of the above questions, it might be time for a plan and, as a mortgage broker, I have dedicated myself to helping people develop and utilize the right mortgage strategy for their financial goals for now and for the life of their mortgage.

More Mortgage Matters articles

About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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