Financially Speaking

Thinking of buying your first home? One of your most important decisions will be choosing the right type of mortgage to make the purchase. With the current low interest rates, you may believe that almost any mortgage product is a low-risk choice. But, keep in mind that interest rates could be higher when that mortgage comes up for renewal.

Here’s what could happen: You have a $200,000 mortgage with a five year fixed rate of 4% interest, amortized over 25 years, with a monthly payment of approximately $1,052. After five years, you will have to renew your mortgage. Even though your mortgage balance is now only $174,107, if the fixed interest rate at that time is 6%, and your remaining amortization period is 20 years, your monthly payment now goes up to $1,240; if the fixed rate is 7%, your monthly payment jumps to $1,339 a month.

Will you be able to manage an increase like that? Make a very careful assessment of “how much house you can afford”. Look at potential income and lifestyle changes, like starting a family or increasing its size, and decide now if you’ll be able to afford a future increase in your mortgage payments.

Next, decide which mortgage type, fixed rate or variable, is best for you. Your choice depends on your personal situation.

A fixed-rate mortgage offers the security of a locked-in interest rate for the term you choose, typically five years, and the same mortgage payment for the term – providing peace of mind and predicable budgeting.

A variable rate mortgage usually offers a lower interest rate than the fixed-rate type but the interest rate is linked to the prime rate which will fluctuate and can impact your total interest costs and your monthly mortgage payment. Many lenders will allow you to lock a variable rate mortgage into a fixed-rate mortgage during your term.

A blended rate mortgage is a combination of fixed and variable rate financing, combining the benefits and risks of each mortgage type.

Your best mortgage choice should be based on your personal financial objectives and overall financial plan. You’ll get the best advice for what’s best for you from your professional advisor.