For potential homeowners seeking their first mortgage, understanding the relationship between interest rates and their monthly loan payment is important.
The team of experts at Newbigging-Pearson Real Estate has its clients’ best interests in mind. Interest rate changes can drive prices for big-ticket items like homes up or down, so it’s good to keep an eye on what the market is doing…because interest rates never stay frozen for long!
Knowing when to sign the loan papers is as important as qualifying for the loan and finding the right home to purchase. Even a slight drop in interest rates can save homeowners thousands of dollars over the life of their mortgage.
In January, a stable run of the Canadian economy prompted the Bank of Canada to raise its interest rate to 1.25 per cent from one per cent. This came on the heels of .25 per cent increases that took place in July and September of 2017.
There are many reasons why the Bank of Canada raises interest rates. As a reason for January’s rate increase, the bank emphasized potential negative side effects to trade and business investment in Canada caused by a renegotiation of the North American Free Trade Agreement. (Financial Post, Jan. 17, “Bank of Canada hikes interest rate on strong economy …”) To date, it remains to be seen if those negative side effects will occur.
When the Bank of Canada raises this “policy rate,” – that’s the overnight rate at which major financial institutions borrow or lend money amongst themselves – the change can influence short-term interest rates for consumer loans and mortgage, and can also alter the exchange rate of the Canadian dollar.
Depending on the type of mortgage a homeowner has arranged with his or her financial institution, monthly payments might go up (or down) right away, or renewal rates will increase. Financial institutions will want to keep their profit margins increasing; a bank’s posted mortgage rates will take into account that small changes to the Bank of Canada’s policy rate will occur.
Knowing the interest rate and understanding its relation to your monthly loan payment may help homeowners decide what kind of mortgage to purchase.
Canadian homeowners with a 20 per cent down payment may qualify for a conventional mortgage, amortized over a period of 25 years.
Some homeowners choose to gamble on a variable rate mortgage, where a payment is set that includes any interest and principle. As interest rates go up or down, the payment remains the same, but more, or less of it will be applied to either the interest or the principle. If interest rates continue to rise, homeowners end up paying down more interest, and less on the principle balance of the loan.
Those who choose to purchase an open mortgage have the opportunity to pay off the loan in entirety or in part without worrying about penalties. Term lengths for an open mortgage range from six months to one year, with posted interest rates that are slightly higher than that of a traditional or a closed mortgage.
In a closed mortgage, homeowners can lock in the interest rate for the duration of the loan, which brings peace of mind.
A convertible mortgage takes advantage of fixed interest rates for periods ranging from six months to one year. If the rates should drop at renewal time, the homeowner benefits.
Discussed in the news lately is a loan called the reverse mortgage. This provides the homeowner who is aged 62 or older the opportunity to transfer equity in the home into cash value, which can be used to augment retirement income. The older the homeowner is and the more equity they have built up in their home will govern the amount of money that can be borrowed. The lender makes monthly payments to the homeowner, instead of the other way around. The loan must be repaid when the home is sold, or otherwise vacated.
The team of experts at Newbigging-Pearson always has its eye on financial news so they are able to warn clients of impending changes to interest rates. Helping our clients understand where their money is going is a part of our team’s service to you.
Are you ready to downsize, or upgrade your home to include an expanding family? The team at Newbigging-Pearson is standing by to help!
Give our office a call at 289-686-1552, or send us a message via our website HERE, on our contact page.