The Canadian mortgage rates continually remain low and of course this is great news to home buyers because they get to reap the benefits of not having to pay exorbitant interest on a monthly basis. Buyers can use this opportunity to enjoy the great savings and use them elsewhere like family holidays, a new car, extra savings for retirement or even extra mortgage payments to speed up the process of paying down your house. In fact, roughly 40% of mortgage holders in Canada, which works out to almost 2 million, took the opportunity to make extra payments on their mortgage in 2012. All seems well with these numbers but still overall Canadian debt load is increasing. Why? Well those extra payments have possibly caused stress elsewhere and so they use their credit cards more often. Stressing yourself to the point where paying off a 3% mortgage and holding a 18% credit card balance just doesn’t make sense!
I’m definitely not here to discourage you from paying off your mortgage faster, but make sure you are putting your money in the right place. Take a minute to focus on what you want to achieve over the next year and try your best to make it happen but not at the expense of increasing your debt load.
I’ve gone off tangent just a little bit from where I wanted to head with this post but the example is definitely valid in getting the point across that we need to plan ahead when looking towards the future. This is even more important when looking to purchase a home, likely your largest investment ever.
How does this affect you, the home seeker?
Taking a quick glimpse at the process you may first be looking at a few homes to see what’s out there, but inevitably you need to get pre-approved for a mortgage first so you can go view homes that you can actually afford. Let’s say you receive your approval at $300,000, you think to yourself “Wow, I can really get something nice for that”. You get all excited, shop around and buy the home you never thought you could get. So, 5 years from now your mortgage comes up for renewal and unfortunately rates rose 1-3%, and you are in a real tight jam because that might raise your payments from $1000-$1300/month.
Do you now have to sell? Cut back on entertainment and recreational expenses? Wait a while to buy that new car even though yours currently makes sounds that alert the whole neighbourhood that your coming home?
Even if you plan ahead sure these things may still be an issue but if all else in life remains relatively stable you can prevent this from occurring. Sure, it sounds easy and logical but surprisingly a lot of buyers don’t think that far ahead, especially if they are in the excitement of finding a home to enjoy with their loved ones.
My advice is simple, make sure you plan ahead. Just because you are approved for $300,000 doesn’t mean you have to spend it all. If rates remain lower even when 5 years are up then you can still relax and know that you are in a solid position and life can continue as you want to. There is no magic number of what you should spend, it will vary depending on your lifestyle. Think it through, write down how much you want to spend on things like entertainment, saving for retirement, car payments, etc. See what’s leftover and then base your decision off of that. Leave room and save some extra money for a possible inflation of interest rates. You can also make extra payments on your mortgage so that if rates do rise then your renewal payment may be similar or lower than what you are paying now. This way you won’t end up like the people described in the beginning of the article. If you enter into a home purchase saying that you want to make extra payments then make sure you do, a lot of people enter in with that mind frame but never make an extra payment either because it’s needed elsewhere like home maintenance or a new car.
Sure the rates could stay this low forever, but is that really likely? Most say no….time will only tell.
As always, I appreciate any comments you may have, please post below.
Sutton Group – Select Realty Inc.
A blog helping people understand more about Real Estate in London, Ontario and Canada