Interest rates are low, but do the math on the newer products
Province
TORONTO — The mortgage shopper has never had it so good — nor so complicated.
The overwhelmingly good news for the home shopper is about interest rates. The posted rate for a closed five-year mortgage at Royal Bank in late January was 6.65 per cent. But a special offer available during the month made the same term available at 5.59 per cent.
At the same time, there are more and more vehicles for the mortgage shopper to use.
For example, in the past year, amortizations have zoomed to 40-year terms, and consumers can also apply for mortgages where only the interest is paid for a certain term.
All this takes place against a background of tough competition between financial institutions for your money — and mortgage brokers who will do the leg work for you and shop around for the best mortgage.
“In today’s environment, it is far more competitive,” observed Patricia Lovett-Reid, vice-president at TD Waterhouse.
“There is far more out there, and doing your homework before you go shopping for the house makes sense.”
Even before you start thinking about mortgage terms and who will get your hard-earned bucks, you have some work to do — it’s critical that consumers get to know their own numbers first.
That’s because you aren’t going to get the best rate going if you are viewed as not having your finances in order. So, you want to sit down and add up all your assets and liabilities, including credit-card debt, RRSPs, car loans and so on.
You also want to make sure your income taxes are up to date, because you may not get a mortgage otherwise.
You want to be armed with proof of income, in the form of pay stubs or a letter from your employer — and they must be recent.
Before you phone the real-estate agent, you will want to visit your financial institution — or mortgage broker — to find out just how much money you can spend on a house.
“There aren’t many real-estate agents that will work with people who are not preapproved, these days,” said Lovett-Reid.
“Why bother?”
She noted that the general rule of thumb is to allocate about 32 per cent of your pretax income to housing costs.
Mortgage brokers have been growing in popularity in recent years as fewer Canadians feel loyalty to one institution to a point where they do all of their financial business at a single place.
A recent survey by the Canadian Institute of Mortgage Brokers and Lenders indicated that more than 31 per cent of Canadians sought the advice of a mortgage broker in 2006, up from 25 per cent in 2006.
Consumers can find themselves asking for trouble if they opt for some of the newer products with much-extended amortization terms and interest-only provisions.
In the case of longer terms, “you run the risk of buying too much house,” said Lovett-Reid.
“You look at the number of luxury autos on the road. And people are leasing them because they can’t afford to buy them. And they can get much more car than they could if they were buying it.”
She offered a few tips for the prospective mortgage shopper.
– Pay weekly. If you had a weekly payment of $415.10 or a monthly payment of $1,640.42 on the same principal amount, the balance will be paid off about three years earlier with weekly payments.
– Check out how much you can pay off on your mortgage each year and how much you can increase your payments.
– Portability: Ask a mortgage specialist if your existing mortgage is transferable if you decide to move.
“It might not be,” said Lovett-Reid, “. . . particularly if you already have a really attractive rate.”
© The Vancouver Province 2007