By Heather Grummett
There’s a lot to think about when purchasing a home and perhaps the last thing on your mind is to consider what you may be doing five years from now. However, looking ahead should definitely be something to think about, and then try to choose a mortgage product that best suits your goals.
“Over half of Canadians break their mortgage before the end of their five year term,” says Doug Adlam, Mortgage Agent for Champion Mortgage Inc. In Guelph. “Some estimate over 70% of Canadians do not reach the end of their five year term without making a change to their mortgage.”
You may decide to break your mortgage before the term is up to refinance and take advantage of lower rates, to consolidate debt, to pay for a renovation, or a child’s education. The next five years have an element of uncertainty and breaking your mortgage may not always be in your control; it may be necessary due to the loss of a job, to start a new business, to pay for medical bills, due to a separation or divorce, or to upsize or downsize your home.
“First time buyers tend to associate the most important part of choosing a mortgage with finding the lowest possible payment,” adds Adlam. “Homeowners automatically associate the lowest possible payment as the lowest rate, then set out on an expedition to find the best rate they can, or negotiate with their bank for their best offer.”
“The future is unpredictable and most homeowners do not know what will happen in the next five years of their lives. The scary thing is that Canadians are selecting mortgage products based on rate alone, and not considering that unpredictability.”
While getting a great interest rate is a very important part of choosing a mortgage, it isn’t always the most important part. Products such as no-frills mortgages are an example of unbelievable rates, wrapped up in a mortgage with very limiting restrictions.
No-frills mortgages have been gaining popularity in the Canadian lending market over the past five years. “Originally we saw these nofrills mortgages offered by small Credit Unions, then some major national lenders, and now the big banks,” states Adlam. “ A no-frills mortgage is essentially where you trade-off flexibility for a lower interest rate.” With a no-frills product homeowners typically have reduced pre-payment privileges, such as lump sum payments and increased payment privileges. The mortgage could have a shorter amortization period, such as a maximum 25 years. Homeowners also lose the ablility to negotiate a competitive rate should they choose to refinance, since refinancing or early renewal options are restricted solely to the existing institution. Plus, as most no-frills mortgages are ‘fully closed’ mortgages, the only way out is by selling your house and paying a hefty penalty.
Some homeowners may consider a no-frills mortgage as an option, but it is one that you should think about carefully. So much can happen during the term of a mortgage – no matter what stage of life you are in. “Most first time buyers upgrade by the end of year four, retirees move into retirement homes, families grow and need more room, and people get job transfers all the time. The fact is, it is very rare to find someone that knows with 100% certainty that nothing will happen for a five year period,” cautions Adlam.
No matter what type of mortgage you are applying for, take the time to make a plan. Even though those plans may change by the end of five years, at least you will have chosen a mortgage geared towards your goals. Consult with a mortgage broker to find out what options are available and flexible to your needs.
Source: Grummet, Heather (April 6 – April 12, 2012 ). More to a mortgage than just a low interest rate. Guelph & District Association of REALTORS ® REAL ESTATE UPDATE, page 16, www.gdar.ca.