This month, we sat down with Sally Bennett, a local mortgage broker, who shared some amazing insights into what’s going on with interest rates and what it means for us, the best way for new buyers to still get into this hot market, and should you choose fixed or variable?
Q: Do buyers need to get pre-qualified? And is it just in today’s market or is it always wise to get pre-qualified before you start shopping for a property?
A: I’m glad you asked. Getting pre-qualified before you start shopping is always a good idea, so you and your realtor can hunt for properties in the right price range. For one reason or another, you might be eligible for a much higher or lower mortgage than you thought. It’s a pretty quick process. You have a short call with a mortgage broker to discuss your goals and submit some income documents. Then we can let you know what price range you qualify for, so you can narrow down the best property for you and feel confident putting in offers. And with properties getting snapped up so quickly these days, we can provide you with pre-approvals customized for specific properties outside normal business hours, so you can get your offers in ahead of the pack.
Q: We’ve started to see interest rates going up. Will it affect my ability to qualify for a mortgage, and once I’m pre-qualified, will this change?
The increase in rates has reduced affordability for buyers who choose fixed-rate mortgages. Buyers going into most fixed rate mortgages are stress-tested against a higher benchmark now (borrower’s rate + 2%). Fortunately, borrowing power with variable rate mortgages hasn’t changed yet. As variable rates are much lower, the same buyer, choosing a variable rate mortgage, can afford more expensive properties. It’s not until variable rates reach 3.26%, that buyers’ affordability will go down with variable mortgages.
And to your second question, it won’t affect pre-qualified buyers with variable rate mortgages. It could impact pre-qualified buyers who choose fixed rate mortgages. So if you’re thinking of buying, upgrading or refinancing, you’ll get more bang for your buck if you do it now.
Q: Other than affordability, what are the pros and cons of fixed versus variable?
Most people who choose fixed, do it for the peace of mind a static payment provides. With so many unknowns in life, it’s comforting to know what we’re up for in mortgage payments. But we pay for that comfort. Fixed rates are almost always higher than variable rates.
Historically, variable works out better than fixed about 80% of the time. Quick math: Variable at 2.25%, fixed at 3.25%. There needs to be four ¼% increases in Prime for your variable rate to reach the fixed rate. And until it does, you’ve saved money by paying a lower rate, so even if the variable rate passes 3.25%, you’re still ahead. What most of our variable clients do is use their prepayment privileges to put the same amount on their mortgage each month as they would’ve paid if they’d gone with fixed. So they pay off their mortgage faster while mitigating risk, rather than just paying peace-of-mind-tax.
And you can always switch from variable to fixed if you’re losing sleep. But you can’t switch from fixed to variable when interest rates go down. Millions of Canadians with fixed mortgages had to sit on the sidelines in the last 2 years watching people pay 2-3% less than them, hoping rates would still be low when their term was up.
Now rate isn’t the only thing to consider when selecting the right mortgage product for you. When you move house, do you say to yourself: I’m never moving again! I have, every time I moved! But life happens and 60% of Canadians break their mortgage in the first 3 years. If your mortgage is variable, it’ll cost you 3 months interest. If you’re fixed in our market, it’s likely to cost you tens of thousands of dollars more. This is something we want all buyers to understand. Life changing circumstances are stressful enough, without a $10,000+ penalty.
Ultimately, we believe variable is best for most of our clients, but there are some exceptions. So we conduct a thorough cost-benefit analysis with all our clients (factoring in intangible benefits like peace of mind and goals) to ensure we help them choose the right mortgage for them.
Q: What does it cost to work with a mortgage broker? And how do I get started?
99% of the time working with a mortgage expert is FREE. The bank pays us a referral fee once we’ve helped you choose the best lender and mortgage product for you. We don’t work for the bank, we work for you, so you get our knowledge, impartial advice, and access to a huge range of lenders and products.
Find out how much you can afford in 30 seconds: https://ilmb-mortgage-pros.mtg-app.com/calculators?refId=f6de6850-ece9-4d33-83cf-f0957c261074
Sally Bennett is a licensed Mortgage Advisor, who loves educating First Time Home Buyers. Her niche is helping people pay off their mortgage faster through property investing and self-employed clients.