Mortgage buyers may have been spoiled by super low rates as of late, but we shouldn’t get too used to it. That’s the mentality taken by half of Canadians, who consider record low financing to be more akin to a flash sale than ‘the new normal’. A recent CIBC poll conducted by Nielsen found 47 per cent of Canadians are convinced mortgage rates will rise by this time next year—and they’re feeling the pressure. According to the study, 48 per cent of respondents would snap up a fixed rate mortgage right now if it meant locking in at today’s competitive pricing.
Discounted rates mean huge savings
Lucking out with such a low rate can be a huge financial break for buyers; the interest savings alone can equal thousands over the course of a mortgage’s amortization. For example, let’s say you scored the best five-year fixed rate on today’s Canadian market (2.89 per cent as of press time, currently offered through a broker). Assuming you have a mortgage value of $378,000 (the national average resale value, according to CMHC), and a 25-year amortization, you’ll pay $152,280.41 in interest by the time your principal is completely paid off.
Now, let’s compare that to five-year mortgage rate of 3.39 per cent (the lowest rate offered right now by a big bank). The interest you’d pay with this rate is $181,608.49.
That’s a difference of $29,328.08!
Beware low rate risks
But while such discounts present significant savings, homeowners should be wary of budget complacency. Higher mortgage rates five years down the road can be a nasty surprise for current owners come renewal time.
It’s important for those locked in at bargain rates to account for higher payments in the future… or risk suddenly being underwater on their mortgage.
Here are a few ways to make the most of mortgage market discounts while preparing for rising ownership costs:
– Don’t tap out your pre-approval potential: A pre-approval is an important first step of the home-buying process; obtaining one gives buyers a firm idea of their affordability, and can also give them a leg up in competitive buying conditions. Knowing your financing is a sure thing can go a long way in a bidding war. However, take care to stay below max affordability to avoid becoming house poor and to keep your finances flexible—doing so will help absorb the shock of future rising prices.
– Stress test your rate: You may be able to swing your current monthly payments with ease, but what if rates were to rise at renewal? See how your monthly payment could change with the help of a mortgage calculator. Awareness early on offers the opportunity to switch up financial planning and saving safeguards to prepare for the worst scenario.
– Use savings to attack your principal: Take advantage of paying less now—use any extra cash flow to amp up your mortgage payments. Doing so reduces your overall principal debt, which equals less paid in interest over your amortization. For example, switching to bi-weekly rapid payments would save $18,416.20 of total interest paid, and shave two years off your mortgage. Making an annual $1,000 lump sum payment would save $11,162.53.
Article courtesy of RatesDotCa
