An interesting look at mortgage rates

Sometimes, people take for granted what they should pay more attention to. For example, first-time homebuyers nowadays may not realize how good they have it, with current mortgage interest rates as low as they are. Just ask anyone who purchased a home in the 1980s and paid double-digit rates. After years of hearing “experts” predict that single-digit mortgage interest rates were a thing of the past, it was amazing to watch the rates plummet to current numbers.

So, what’s the big deal? I wonder whether people entering the homeownership marketplace understand how significant the rate is over the course of the mortgage amortization. A small fraction of a percentage point now can mean a big difference in what you actually pay during your amortization period.

Let’s look at a few examples using a $300,000 mortgage over a 25-year amortization, paying monthly for the full 25 years.

Mortgage interest rate of three per cent: $1,422.63 per month = $426,789 total paid at 25 years

Mortgage interest rate of 3.1 per cent: $1,438.29 per month = $431,487 total paid at 25 years

Mortgage interest rate of 3.2 per cent: $1,454.04 per month = $436,212 total paid at 25 years

Going from 3.0 per cent to 3.1 per cent costs you $4,698; from 3.0 per cent to 3.2 per cent, you pay another $9,423. Again, even a fraction of a percentage point lower can save you thousands in the end – and who can’t use thousands of dollars at any stage of life? Now, keep in mind, usually you are working with a limited-year term, which changes the amounts slightly. If you want a more detailed calculation, the Government of Canada’s mortgage calculator (https://bit.ly/2zvHjMD) takes the term into consideration.

When you purchase a home as a first-time buyer, or frankly, as a seasoned buyer, it is wise to investigate every avenue possible that will save you money in the long run. As everyone’s situation is different, check with a representative of your financial institution or a mortgage broker to find out what type of mortgage and rate will serve you best.

The one thing holding back first-time and other buyers is the mortgage stress test imposed last year, which begs the question as to whether it is in everyone’s best interest. Trust me, builders and developers want people to be able to afford homes and condos. It is easy to get caught up in the excitement of buying a new home – especially if it is your first – but remember to think long term as well. Your mortgage interest rate is one example. Another is to select finishes and upgrades with future resale in mind.

When it comes to money, the moral of the story is to buy NOW as opposed to later, when rates are likely to go up. However you look at it, buying sooner rather than later will save you money in the future.

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