In this short article I am going to talk about why mortgage rates are not the most important thing when signing up for your mortgage.
Biggest Myth about Mortgages
The biggest myth about mortgage rates is that the lowest rate corresponds to the least amount paid for mortgage. Most people assume that the only way they can get the best mortgage deal is by getting the lowest rates. When I ask them why they need the lowest rate, they think I am crazy. Here is a top reason why rate is not the most important thing:
Reason 1: Mortgage Penalty is More Important Than Payments
Why? Stats say that more than 70% of Canadians end up breaking their mortgage or refinance the mortgage in 36 months, so won’t it be wise to see how much mortgage penalty you have to pay when breaking a mortgage. Take a look at the slide below.
| Bank A | Bank B | ||
| Remaining Balance | $200,000 | $200,000 | |
| Interest Rate (the client’s current rate) | 3.49% | 3.49% | |
| Discount on rate (given at funding) | 1.95% | 0% | |
| Months Remaining | 24 | 24 | |
| Caparison rate(posted rate of the term closest to the number of months remaining) | 6.10 (4.15% + 1.95%) | 4.15% | |
| 3 months interest | $1,745 | $1,745 | |
| Interest rate differential | $5,160 | ($2,640) |
This an eye opener for most clients! This table shows the same amount of money borrowed from two different banks, in one case the mortgage penalty is $5160 and in another case the mortgage penalty is $1745.
Reason 2:
The dollar difference is not worth giving up the flexibility of terms, and reduced negotiation strength at the time of renewal. The following table shows an example of payment for $100,000 borrowed from two banks. The payment difference at 2.99 and 3.09 is literally $6 every month, which is $360 over 5 years.
|
Example1 |
Example 2 |
|
| Interest rate | 2.99% | 3.09% |
| Monthly Payment | $472.73 | $477.88 |
These are just a few of the reasons why mortgage rates are not the most important factor to consider when shopping for a mortgage. I hope you found this article about the importance of mortgage rates useful. For more information about mortgages In Brampton, tips and tricks, and any other information please visit my other blog posts. Thanks again for reading and see you next time!
