Interest rates are always a hot topic of interest (no pun intended!). In the real estate business, interest rates are naturally very important, as a sudden increase could mean stressed-out buyers and a drop in property sales, and a big rate cut usually means a very busy housing market! Further, interest rates can have an impact on whether someone is approved for a mortgage or not. It’s not uncommon for an offer on a home to be ‘conditional upon financing’, meaning that the potential buyers will rush off to their bank or lender to get approved for a mortgage (or bridge loan) in hopes that they will get financing AND their dream home!
We always recommend that home-buyers get pre-approved for financing before they start searching for a property. Not only will you have peace of mind when it comes time to put in that offer, it allows you to learn exactly how much home you can afford, as well as understand what type of mortgage you will have and what your payments will be. Beware though that this is not a guarantee that the lender will finance the specific property you would like to purchase.
Let’s learn a little about interest rate basics so you can start home hunting with more confidence:
It’s important to shop around and compare interest rates, because even a quarter of a percentage rate can make a massive difference to your mortgage payments over time. Be sure to talk to a variety of lenders, including banks, credit unions and/or certified mortgage brokers before you make your final decision. However, sometimes it’s not just about getting the lowest interest rate, but also the best interest rate that works for you. Here are a couple of things to consider when thinking about your mortgage:
Interest rate/mortgage basics
Most people are aware that any loan from a bank or lender will have some type of interest rate attached to it. An interest rate is the percent of the total (or ‘principal’) amount of your loan that is charged for the use of the loan. In Canada, most lenders will finance 80% of the price of a property, leaving applicants to come up with the rest through a down payment or by getting mortgage insurance. Over the life of your mortgage (called the amortization period, which is anywhere from 10 – 30 years on average), you’ll make regular payments that will pay down the principal and the interest. The longer it takes you to pay off your mortgage, the more you will pay in interest payments.
Variable vs. fixed rates
How much interest you will pay on your mortgage is based on the type of mortgage you get and how long your amortization period is. While there are many types of mortgages, the two most popular options in Canada are variable and fixed rate mortgages.
A variable rate is that just that: it varies depending on the current market conditions for the length of the term (usually 6 months up to 2 or 5 years). When interest rates go down, you will pay off more of the principal of your mortgage, but when interest rates rise, you end up paying more in interest.
A fixed rate mortgage is a mortgage that has the interest rate locked in throughout the term, no matter what the current market conditions are. Even if market rates double, you will have the peace of mind knowing you are still paying the same amount. However, if rates go down, you won’t get to enjoy those savings as you are locked in to your rate for the length of your term. If you wish you break your mortgage and go with a lower interest rate, there is usually a hefty fee or payment penalty attached.
If you’ve got questions about interest rates, mortgages or pre-approvals, talk to us at Clairwood Real Estate. Our experienced and knowledgeable Realtors® understand the current markets, interest rates, pre-approvals and more. We can help make the process of buying or selling a whole lot easier. Connect with Clairwood Real Estate today at 705-445-7085 – we’re excited to be part of your journey!