Which Mortgage Is Best?

There are a variety of mortgages, and each one has its advantages and disadvantages.

A fixed rate, closed mortgage - about 75% of mortgages across Canada are fixed rate, closed mortgages.  Typically someone locks in their rate and payment for 5 years.  This lets consumers know what their payment will be every month and how much will be left on the mortgage at the end of the 5 year term.

A variable, closed mortgage - this mortgage has a rate that floats with a financial institution's prime lending rate and is often for a 5 year term.  Usually the payment is set at the current rate and then the actual interest rate goes up and down throughout the mortgage.  The advantages are that this rate is usually lower than a fixed rate and that if the rate decreases your payment is paying more towards the mortgage principal.  However, the disadvantage is that if the rate goes up you will pay more in interest and it is possible that very little of the principal is paid down by the end of the term.

Why Rates Go Up Or Down

There has been a lot of talk in the media about the effects of rising interest rates and what they will do the economy.  Some say it is a sign of growth, others say it will harm growth and kill the middle income Canadian family.  Let's start off with some basic facts about interest rates:

Interest is the cost of borrowing or the return for lending money, depending on if you are the borrower or the lender.  The rates at which lenders are willing to lend at are determined by risk, lending competition, and the desired rate of return.  The general rates at which borrowers borrow money at are determined by almost the same things; risk, lending competition, and the forecast rate of return.

Risk -  If risk is considered high, than rates increase.  There is a lot that goes into high level risk assessment some of them working against or with each other: the state of the economy (federal and international), inflation, Central Bank intervention, and the supply and demand for money.

Are low interest rates actually good?

Mortgage rates look really good right now.  They have never been as low as they have been in 2009, and they probably won’t be returning to these lows again any time soon.

The low mortgage rates have helped a lot of home owners to pay down their mortgages more quickly because of lower payments and lower inters charged.  The rates have also caused some people to purchase a home they probably can’t really afford.  Let’s look at the numbers:

You are purchasing a $340,000 home and have about $90,000 to put down, meaning you need to get a $250,000 mortgage. 

Best Investment Advice: Do It

A lot of people are quite willing to sell their investment advice books about the best stocks, bonds or GIC to invest in, but I offer some very basic investment advice:

Start putting something away now, and do it regularly for as long as you possibly can.

There are two benefits to putting money away over a long period of time: