September 19, 2020

How to play the low interest-rate game


Globe and Mail Update

With interest rates at record lows – for now, at least – it’s tempting to buy as much house as affordable as quickly as possible.

Experts say some families are buying prematurely, to cash in on low interest rates, while others are stretching their budgets to buy more expensive homes with hopes to magnify the appreciation they might cash in on.

 Stick to your goals, not your lender’s

“The lender does not tell you how much you can borrow,” says Ted Rechtshaffen, president and chief executive officer of the financial consulting firm TriDelta Financial in Toronto. “You tell yourself how much you can borrow.”

“People always want to know, ‘What’s the max I can afford?’” says Mr. Gaetano. “But the max may not be the best thing for them, considering their lifestyle.”

A detailed household budget will help determine what you can afford. “A lot of people assume they know what they spend, but it’s almost always more,” says Mr. Rechtshaffen, who recommends recording all costs in a spreadsheet.

Be mindful of how that budget can change, particularly for couples about to start a family, he says. “As the father of three relatively young kids, I can tell you the costs go up every year.”

Lender approval can also be problematic because qualifying criteria might have become out of date, says Mr. Gaetano. “It doesn’t take into account some costs, like mobile fees,” he says, “or the increasing cost of hydro and utilities.”

Don’t skimp on the down payment

If you can afford to put down only 5 per cent, you can’t afford the house, says Mr. Rechtshaffen. “There are too many unknowns out there, and with five per cent down, you’re making the riskiest investment you can make,” he says.

This is particularly true in steep real estate markets such as Toronto and Vancouver. “It’s a bigger issue in Vancouver, where prices have been more volatile, than in Toronto,” he says. “If you put five per cent down in Vancouver and the wind blows in the wrong direction for a year, you could have negative equity very quickly.”

Putting down at least 20 per cent will also save you the cost of Canada Mortgage and Housing Corporation mortgage insurance, he adds.

He also recommends against mortgage life insurance, urging people to choose a life insurance policy that in some way includes the mortgage. “While there is some benefit to the buyer, the biggest benefit is to the lender,” says Mr. Rechtshaffen. “There are much better deals out there on life insurance that are not directly tied to your mortgage.”

Plan on an interest rate hike

The best way to take advantage of low rates, and to be prepared for their expected rise, is to make payments equivalent to what a higher rate, say 6 per cent, would demand from the get-go.

Kathy Nguyen, a mortgage specialist in Vancouver, recommends this approach. “I tell buyers if you are a bit of a risk taker, go with a variable rate mortgage, but continue making monthly payments based on the higher fixed rate. Yes, the monthly payment is more than what’s required, but the entire additional amount goes toward paying down principal.”

Mr. Gaetano has a similar philosophy, regardless of whether a borrower holds a variable or fixed rate mortgage. “There’s no use in worrying about where interest rates are going to go,” he says. “The focus should be on getting rid of your debt.”

He recommends aggressively paying down a mortgage before interest rates rise. “Get your mortgage down to half of what you started with and by the time rates double you’ll [effectively] be paying the same interest rate.”

Most people gloss over their mortgage’s payment clauses, which give them permission to pay amounts in addition to the required payments.

“A lot of people ignore them, but they’re the way you will get ahead,” he says. “The key is understanding that you need to make more than just the minimum payment. Banks want you to make the minimum payment forever because they make interest forever.”

An added benefit of this strategy is the good standing it puts you in with the lender. “Banks will notice that you’ve accelerated payment, and if you find yourself in trouble, they’re going to help you minimize the payment and give you breathing room,” says Mr. Gaetano.

Give yourself a cushion

Mr. Rechtshaffen encourages homeowners to secure a line of credit to fall back on if times get tough.

“Do your best to have a line of credit when you take out a mortgage, and don’t use it. If you have financial discipline, that line of credit is free insurance,” he advises.

Talk to your lender

If you have trouble making mortgage payments because of rising interest rates, being forthcoming with your lender is your best tactic, says Ms. Nguyen. She suggests working with a mortgage broker, who can help renegotiate with your current lender but also see whether a different lender can offer a more competitive rate.

“We look at the entire financial picture,” she says. “ If you have a high car loan payment, it could make sense to consolidate that payment with your mortgage if the interest rate is lower. The point is to reduce your total monthly payments.”

Tools at your fingertips

Canada Mortgage and Housing Corporation: The consumer section of this website features a range of tools, from a household budget calculator to a mortgage affordability calculator. You will also find information on government financial assistance programs and a renovation guide.

Financial Consumer Agency of Canada: This government agency site delivers a mortgage qualifier tool and tip sheets on topics including amortization and reverse mortgages, as well as a tool that helps you determine what type of mortgage is right for you.

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