Business - Real Estate

If you are asking yourself how to get the best interest rate (taux hypothécaire) on your mortgage, you are asking the wrong question. (For more about that, read How to beat the best rate!). What you should be thinking about is how do I choose the right mortgage strategy for my particular needs.

What’s the right mortgage strategy? Well, you probably can’t answer that question for yourself. What you can do is consult a mortgage specialist who specializes in custom mortgage packages. Why do you need to do this? The main reasons are:

we don’t know where interest rates are going.
economic conditions, both present and future have to be considered.
A mortgage strategy is a complex, uniquely personalized approach that takes each borrower’s situation into account.

With the expertise of an experienced mortgage professional, the two of you can sit down and design the exact product that will work for you. You see, he has special training to know and understand each of the mortgage products (prêts hypothécaires) on the market, and know how each one would apply in a given set of circumstances. In addition, he understands the economy in general and probable impact of interest rate trends over the projected life of your mortgage.

Thousands of papers and hundreds of books have been written about the movement of interest rates. But for a basic understanding you need to know the three scenarios that interest rates can take and the two rules that interest rates follow.

Scenario One: Interest rates rise, as they did from 1950 to 1980.
Scenario Two: Interest rates decline, as they did from 1982 to 2003.
Scenario Three: Interest rates remain stable, as they have from 2003 to 2006.

To work within these trends is important, since, if you use the wrong mortgage strategy (for example one designed for falling rates, and then rates go up), you will be paying way too much for your home loan.

Next, you have to understand the rules of interest rates:

Interest rates reflect inflation. If there is an increase in the consumer price index, interest rates should increase.
Interest rates are tied to a country’s economic performance. A strong economy will mean increased interest rates, since there is a higher demand for money, and a weaker economy will mean lower interest rates, since the demand for money will go down. It is also important to understand the rules of interest rates.

Predicting interest rates is just about impossible. Over the last thirty years interest rates have increased, averaging 9.25%, but recently have been decreasing and are now approaching 5%. At this level, you may think about a fixed rate mortgage for five years. But that strategy has been the most costly over the past decades.

There are quite a few mortgage strategies that mortgage brokers have to choose from. An expert mortgage professional (courtier en hypothèque) can pick and choose from this mixed bag of strategies and design the perfect one for you.

Here are the basic mortgage strategies:

5 times 5-A fixed term five year mortgage, renewed 5 times.
Long term-a fixed rate mortgage for 15, 20 or 25 years.
Variable rate-a mortgage with an interest rate that changes based on the Bank of Canada base rate.
Smith Maneuver-the borrower can deduct mortgage interest from income tax.
More retirement-the equity built up in a residence is used to create retirement income.
No down payment-calculate the cost of renting while saving for a down payment as compared to taking a larger loan.
Less than perfect credit-use a loan to repair credit so a mortgage will be cheaper later.

The secret is to find the right strategy or mix of strategies for the borrower. In doing so, a mortgage broker (Intelligence Hypothécaire) can save a client a lot on the cost of the mortgage.

Analyzing each of these strategies on its own is important, and then the borrower’s individual circumstances must be taken into account, as well as the general economy of the country. Not using a professional mortgage (prêts hypothécaires) expert to do these analyses can be dangerous and expensive. The best decision you can make is to contact a mortgage specialist to assist you; this free consultation may be worth a fortune!