August 20, 2012

Short-term strategy for long-term stability

British Columbians continue to carry the largest mortgages in Canada, so it’s no surprise that choosing the right mortgage term and options is very important. With the uncertainty of where interest rates are headed towards 2013 and beyond, home buyers more than ever are struggling with decisions about their mortgage term options. Customers sometimes ask for a mortgage with the same term and rate that their friends received. While their friends may have chosen a mortgage term that suits them, it may not necessarily be what’s right for you, so expert advice regarding terms and options is important.

Mortgage portability and assumption features are often overlooked and become much more important to you during a time when interest rates are rising, so make sure you ask about these options when shopping for a mortgage. Let’s assume that you are about to buy a home and that interest rates could be higher two years from now. We know that rates are now at historical lows. Let’s also assume that you might sell in two or three years and buy a different property. In the meantime, you have limited cash flow and want to pay your mortgage off as quickly as possible.

Kevin Lutz, RBC regional sales manager, Residential Mortgages

You see a low two- or three-year rate advertised and think, “Wow, that is a low rate and my payments and interest will be reduced.” It fits with your strategy of timing the mortgage term end with the potential sale of your property and you will take the risk of moving into whatever interest rates are at that time should you not sell or need a new mortgage.

Let’s look at why a longer-term mortgage could make sense for you and assume instead that you opt for a five- or seven-year interest rate term. You still plan on selling in two or three years. If your mortgage comes with a portability option, you can transfer the terms and conditions of your current five or seven-year mortgage to a new home purchase when you sell in two or three years. Alternatively, if you need more money to pay for a new home, your new mortgage can be increased and existing low rate blended with the current posted rate to obtain a weighted annual interest rate. Depending on current rates and your final blended rate with the add-on amount, your modified monthly payments could be more economical than they would be with a brand new mortgage. In other words, today’s low interest rates coupled with the longer mortgage term can become your “asset” and an attractive choice that can save you money when your existing mortgage rate is lower than current rates.

The mortgage assumption option can also be an asset and good tactic, particularly if you have a low interest, longer-term mortgage in a buyer’s market and especially when mortgage rates are rising. Using the same example, let’s assume you took a five-year rate at today’s low rates and you sell in two or three years. Your existing low rate mortgage can be an attractive feature for prospective buyers. In other words, you can allow a buyer to take over your mortgage or “assume” it. And if rates are on the rise, your low-rate mortgage gives your buyer built-in monthly savings until the end of your mortgage term. Note that a buyer can only assume your mortgage if he/she meets the usual mortgage qualification requirements and if you decide not to take it with you to your new home.

The assumption option can also help your realtor sell your home. When there are more homes for sale than potential buyers, an attractive mortgage rate that’s assumable can help boost the appeal of your home and swing a sale in your favour.

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