There are so many mortgage products and rates out there, it can be hard to choose which one is the best for you. After all, the interest rate isn’t the most important factor. The new year is fast approaching, and if you’ve declared that 2017 is the year that you’ll buy a home, it’s time to figure out how to compare all of the different products out there.
Fixed or variable?
The first thing you’ll want to do is understand the different types of mortgages. The broadest categories are fixed rate and variable rate mortgages, in which the interest rate remains the same for a specific period of time or fluctuates over a specific period of time, respectively. Depending on the conditions outlined in the variable rate mortgage, you’ll either retain the same monthly payment and the amount that gets paid toward the principal will change with the interest rate, or the payment itself may change. Knowing what type of mortgage you want when it comes to having a fixed or variable rate can help you set your priorities: if you have a fixed rate mortgage, you’ll know exactly what you’re paying for a set period of time, which would be beneficial if you’re expecting some changes in other areas of your life; or you know that you can withstand the potential fluctuations – and the possible benefits – of a variable rate mortgage and are able to give yourself a monetary cushion in case your payments change within the specified term.
It’s easy to stereotype these mortgages with fixed being safe and variable being risky, but that’s not the whole story.
Chris Allard, a mortgage agent with Dominion Lending Centres, works with many first-time home buyers and often has to explain that rate concerns aren’t the only thing that distinguishes fixed from variable rate mortgages.
“While variable rate mortgages can be perceived as more risky, and they definitely have the opportunity to be more risky, they also tend to have smaller mortgage penalties. If you want to be with a bank, then maybe a variable rate mortgage might even make more sense.”
Interest rates or other features?
Interest rates change over time, although that period of time can be a matter of six months or six years. If there isn’t much difference in the interest rates between a fixed and a variable rate mortgage when you want to get your preapproval – and, quite frankly – even if there is, you want to look closer at the different features of the mortgage.
One of these features is portability. Regardless of the fact that the five-year fixed rate mortgage is a popular product for first-time home buyers and more seasoned home buyers alike, most people end up breaking their mortgage term for one reason or another, whether it’s because co-applicants split up and go their separate ways, or because people refinance and/or switch lenders. Allard says that because circumstances often change and so many people end up breaking their mortgages, most of the mortgages he sets up for his clients are portable, and have the ability to increase the size of the mortgage if clients want to move up to a larger or nicer (i.e., more expensive) home before their current term has expired.
“The first question they ask is always, ‘what’s the best rate,’ and that’s probably the last question I answer,” Allard says. “I always compare the difference in mortgage payments to Subway sandwiches: how many more Subway sandwiches a month does it cost to get this mortgage or this other mortgage? If you use an example like that they realize that what they’re comparing is sometimes almost silly; obviously you want to save the five or 10 bucks a month, but if it’s the difference between saving five or 10 bucks a month and paying so much more in penalties, maybe it is worth it.”
Lender preferences
Home buyers are often unaware of the wide variety of lenders in the mortgage space these days.
Allard says that while clients may know of mortgage companies apart from the big banks, they only know what they’ve been told by the banks – good and bad. And, most often the information that buyers receive secondhand isn’t exactly correct, for example, referring to non-bank lenders as ‘B’ lenders, when in actuality, most non-bank lenders want the same kind of business as the big banks: top-notch ‘AAA’ borrowers.
Different lenders also cater to different clients, even if they’re all “good” borrowers. For example, some mortgage companies and smaller lenders are much more likely to work with borrowers who are self-employed than some of the bigger lenders. And some of the bigger lenders offer products that often aren’t available to smaller lenders. Again, it all boils down to your specific situation and what’s best the best option for your needs.
Getting advice
Hearing about mortgage companies is just one example of borrowers leaning on advice from others, something that Allard says is particularly clear when it comes to first-time buyers and their parents.
“People tend to lean toward fixed rate mortgages because their parents told them that fixed rates were better, and also because in the past, until 30 days ago, that’s also the only thing that they qualified for.”
In other words, while 75 out of 100 of his clients might have taken fixed rate mortgages, those numbers don’t tell the whole story: 50 of those 75 clients may have only qualify for 5-year fixed rate mortgages since those mortgages were exempt from stress tests at a higher interest rate.
“We really dig deep into what are those predisposed thoughts that our borrowers have and we try and show them that some of them are correct and some of them are myths,” Allard says. “Most people just go at mortgages blindly and say what’s the best rate, and they really don’t understand the nuances – that’s not to say that everyone is like that, but most of them don’t understand every single nuance.”
Jump right in
That’s not to knock advice from well-meaning friends and family; they can give you a range of experience as well as sharing things they wish they would’ve done differently.
“Definitely talk to family and friends, definitely feel comfortable doing a little bit of research online, but I think the borrowers would also greatly benefit from actually speaking to a professional, whether it’s face-to-face or over the phone because the fact of the matter is that a lot of the information that our friends and family know – some of it is correct and some of it isn’t,” Allard says.
He also encourages home buyers to do their own research online but to take everything with a grain of salt. “It’s often good information, but it’s about really understanding how that actually impacts your situation. So not every rate that you see online you qualify for, and not every product that you see online you qualify for. So do a little bit of digging, ask those questions, but make sure you speak with a licensed mortgage broker, hopefully an accredited mortgage professional, someone who is perhaps more ethical, someone who does a decent amount of volume and don’t be shy to interview your broker and ask them who they are and what they’re all about.”
Ultimately, you want to do your research and then go to a mortgage broker armed with questions. They should be able to walk you through everything: the difference between big banks, credit unions, and mortgage companies; the advantages and disadvantages of each; the pros and cons to fixed and variable rate mortgages and which is better for you given your personal risk tolerance and anticipated financial situation for the life of the loan; and, of course, the worst case scenarios of what would happen if you end up breaking your mortgage and having to pay penalties. Once you’re educated, you’ll feel much more confident in deciding which mortgage is right for you.
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