Navigating Mortgage Rates: More Than Just the Numbers
In the world of mortgages, one question that frequently arises is, “What’s the best rate I can get?” While securing a low interest rate is crucial, it’s not the sole factor to consider. Let’s delve into why in this blog post.
Mortgage Features
Like everything in life, the lowest price doesn’t necessarily mean it’s the best product or service. With lower rates, you may get a mortgage product that is limited in features. You might be wondering what kind of features you would want in a mortgage; after all, this isn’t a car. Some things to consider when choosing a mortgage include porting options (perhaps your job requires you to be relocated), prepayment privileges (maybe you need to prepay a large amount of the mortgage), cashback options, HELOC options, purchase-plus improvements, options to possibly skip a mortgage payment or two, and options to lock in a variable rate at a certain point, among others. There are various factors to consider when choosing the mortgage that best fits your needs, and it's not just about the interest rate. It’s important to be put into the best mortgage that fits your particular situation.
The Illusion of the ‘Best Rate’
More often than not, the coveted ‘best rate’ is associated with a 5-year fixed mortgage. However, it’s essential to note that the best rate is typically further linked to an insured 5-year mortgage, necessitating the additional cost of mortgage insurance. While the interest may be lower, it might not translate to the most cost-effective option for the borrower in the long run.
Beyond the Numbers
When evaluating mortgage options, there are a lot of other factors to weigh. Notably, 5-year mortgages tend to have the highest penalties should you need to break them prior to the end of the term. Consider this scenario: if you foresee a move within the next 2-3 years, opting for a 5-year fixed might lead to substantial fees for breaking the mortgage compared to selecting a shorter term with a marginally higher rate.
Understanding Penalties
These penalties are generally calculated based on the greater of an interest rate differential (IRD) or three months’ interest. The IRD reflects the disparity between the interest rate on your current mortgage and the rate the lender can charge for a mortgage term akin to the remaining term on your original agreement. Depending on your mortgage contract, additional costs to break the mortgage may include administrative fees, discharge fees, legal expenses, and more.
Lower Rate, Higher Fees and Vice Versa
In some cases, there may be a situation where you’re offered a better rate, but that rate comes with a fee associated with it. Alternatively, you may be offered a higher rate but a lower fee. It’s important to evaluate which option offers the lowest cost of borrowing. Fixating on the lower rate but having a high fee may not necessarily be the best and cheapest option for you.
A Holistic View
While rates definitely carry weight, they are just one piece of the puzzle. It’s crucial to recognize that the ‘best rate’ isn’t necessarily the most economical option for you. Additionally, factors such as borrower income, existing debts, credit score, and more play an integral role in determining the ideal mortgage arrangement.
In essence, choosing the right mortgage is about more than just looking at interest rates. It requires a comprehensive understanding of your unique financial situation and future plans. By taking a holistic approach, you’ll be better equipped to make a decision that aligns with your long-term financial well-being. At the end of the day, there's a saying: you marry the house and date the rate; the interest rate is just temporary.
Remember, a mortgage is a significant financial commitment, and a well-informed choice can make all the difference. So, consider the bigger picture, consult with a mortgage professional, and navigate the world of mortgages with confidence.
If you have any questions, feel free to contact me and I would be happy to assist.