Save Your Money!

Terms            Bank Rates          Our Rates

1 YEAR           3.20%                  2.44%
2 YEARS         3.45%                  2.69%
3 YEARS         4.00%                  2.90%
4 YEARS         4.94%                  3.44%
5 YEARS         5.19%                  3.49%
7 YEARS         6.09%                  4.75%
10 YEARS       6.40%                  5.15%

Current mortgage interest rates have settled down to a prolonged,  low, factor that allows buyers to borrow substantial amounts of capital to purchase good homes. I say prolonged and predictable because over the last ten years rates have become more and more affordable. The origin of our low interest rates began with a world recession that started about 15 years ago. It appears that with the world economy still very sensitive to the US financial crisis of 2008 interest rates will remain low for the next 5 years because inflation rates are extremely low. Governments fear the chaos that inflationary prices have on political security and when inflation begins to rise they use an effective tool to keep inflation in check. They raise the prime borrowing rate charged to banks who in turn pass the interest rate hikes to the consumer. When borrowing become more expensive, consumer spending and speculation slows down too. Inflation is kept in check.

So the interest rate chart above shows a spread of less than two points between the one year and the ten year rate. This is called the interest rate spread. This means that you can borrow today at 2.44 % for one year but maybe because of fear there will be increases in the future you decide to pay a little extra to lock in at 5.15 %. What the heck, you can afford the small amount more and its worth the peace of mind. Right? This sounds fine now but who is to say that interest rates will skyrocket in the near future? It doesn’t seem logical that rates will explode upward when the spread is this flat. And what is the spread? Less than 3%! or, $146. more per monthly payment. Well, here’s what banks won’t tell you. Why not add the amount to your monthly payment in the begining. That way you save!

So what if rates go up? That will eventually happen but probably slowly and with lots of tell tale signs. What can you do if you have chosen the short term, least expensive rate? Consider these five points:

  • Your ability to pay off a mortgage increases over time.
  • You may have a pay raise.
  • Your principal amount borrowed will decrease year after year through your blended payments.
  • Say you invest your RRSP return in your mortgage principal taking off $10,000 per year; very smart by the way!
  • The net effect of these actions mitigates against choosing the more expensive long term interest rate because the amount you borrow decreases so that if and when the rates go up you pay the higher rate on the lower amount. So Save Your Money

Choose a shorter amortization instead of a long term interest rate. For example choose 23 years instead of 25 years. Invest the spread in your amortization. This will increase your payments but pay off the principal and interest sooner saving you money. When the year is up go for another year’s term and you will always benefit from the lowest interest rate available. The cumulative effect is you pay less and create wealth for yourself instead of the shush, b a n k. If for some reason you need to revert to the original amortization period you can renegotiate with the bank at the end of the year.

You have lots of bargaining power because the banks wants to keep steady customers. If for some reason you need to move or sell your house you will have more freedom because the interest term is shorter. How convenient when you want flexibility and affordability. 
My strategy is buy as much house as you can and then stretch some more. You’ll grow into the house in five years! Interest rates have not been this low in 30 years.

Comment on this post or send an email. I’ll offer my opinion if you’d like to talk about your approaching mortgage renewal.