Jan 19, 2024
(First published January 19, 2024)
When it comes to choosing a mortgage, it's common for borrowers to focus primarily on finding the lowest interest rate. While an attractive rate is undoubtedly important, it should not be the sole criterion in your decision-making process. In this article, we’ll delve into why prioritizing mortgage rate above all else is a limited approach and how adopting a more comprehensive strategy can lead to better financial outcomes.
The Misleading Allure of the Lowest Rate
Comparing rates from the Big Banks, today’s lowest rate for a 5 year term is 5.14% and 5.39% for a 3 year term. The 5-year term at a lower rate might appear to be the right choice if you are looking for the lowest rate - but this could mean being locked into higher rates for longer, especially if rates are expected to decrease. OK - so what if you agree that taking the 3 year term is the better approach to take because you also expect rates to decrease and don’t want to lock into today’s rates for 5 years? BUT, there is also an even lower rate available (5.09%) on a 3 year term from another non-Bank lender. Should you take the lower rate at 5.09%? It depends…
The Hidden Costs of the "Best" Rate
Choosing the lowest rate without considering other factors can lead to unanticipated costs. A mortgage with limited pre-payment options, for instance, may restrict your ability to pay off your loan early or refinance. Moreover, some lenders may impose hefty penalties for early contract termination (I've seen penalties as high as $50,000!). It’s crucial to understand these potential costs - and that’s why I often like to think of paying a little more per month on a better product that meets my needs for today and my potential tomorrow as a form of "insurance" against unforeseen changes in your financial situation.
A Three-Step Approach to Mortgage Selection
1.Strategize and Forecast
Assess Refinancing Needs: Determine if your situation might require refinancing during your mortgage term. This influences whether you need an open mortgage or one with reasonable exit costs and allowances
Interest Rate Trends: Consider the direction in which interest rates are moving to decide between short-term or long-term, fixed or variable options
Future Financial Changes: Anticipate any changes in your financial situation, such as increased income or expenses that will be ending. If this happens, you could become mortgage-free faster - but only if the product that you select with your forecast in mind allows for it
2.Choosing the Right Product
Based on your Strategy and Forecast, look for mortgage products that align with your future plans. This might include options with high pre-payment allowances, portability features, or reasonable penalty calculations for early payoffs
3.Securing the Best Rate
Finally, focus on securing a competitive rate for the chosen product. But remember the rate needs to be for a product and term that aligns with your strategy. And (also remember) that not all rates are equal - the frequency of interest compounding can make a lower rate more expensive in the long run
Conclusion: The Role of a Mortgage Agent
Navigating the complexities of mortgage products and rates can be challenging. This is where the expertise of a Mortgage Agent becomes invaluable. A skilled Mortgage Agent will help you develop a tailored strategy that considers both current and future needs. They have access to a broader range of products than a typical bank and can discern the subtle differences between them. Most importantly, they can secure the best rate for your specific situation, ensuring that your mortgage is not just affordable today, but adaptable for the future.
Remember, the goal is to find a mortgage that provides financial flexibility and security, not just the lowest initial rate. By adopting a strategic approach to your mortgage decision, you can save yourself from potential financial pitfalls and align your mortgage choice with your overall financial goals.
Ready to discuss your home ownership goals and a Better Mortgage by Dom?