And the mortgage rate wars rage on...again

The Bank of Canada’s recent decision to drop its overnight lending rate to 0.75 per cent has prompted some of the big banks to follow suit and drop their mortgage rate. TD has even reportedly predicted another rate cut by the BoC in the future. What does this mean for mortgage holders and investors? The mortgage rate wars are all good news, that’s for sure.

1. A low mortgage rate is great for your bottom line.

A lower mortgage rate makes a big difference to your bottom line as an investor. How? By paying down your principal faster, you’ll also pay less interest. Consider this: on a $300,000 investment property with 20 per cent down, at a three-per-cent interest rate, you will pay off $34,860 in principal in the first five years of your mortgage and $33,287 in interest. At a six-per-cent interest rate, you would pay down only $24,391 in principal and a whopping $67,739 in interest over the first five years of your mortgage. Buying the right home, with the right mortgage rate, is a great move.

2. The low mortgage rate is here to stay.

For the last five years it’s been the same old song from the skeptics: “Yes interest rates are low, but what happens to everyone when rates jump back up to normal?” The reality is that the interest rates are not going anywhere any time soon. The BoC has recently admitted that low rates are here to stay in the foreseeable future. The U.S. federal reserve is saying the same thing. No civilized country on earth is raising interest rates, so why would Canada? The U.S. economy, and therefore the world’s economy, is still sputtering along at a snail’s pace. It’s time to accept the fact that we will be in a low interest rate environment perhaps for the next decade or more. Are you going to sit on the sidelines and wait for higher rates or are you going to take advantage and act now?

3. When your mortgage rate starts to rise, don’t worry. Here’s why:

The fears that people have about rising interest rates and a subsequent falling real estate market are irrational. Here’s why: if and when the Bank of Canada raises interest rates, that will mean that the economy is doing better than it is now, not worse. A better economy means more jobs and higher wages which means more demand for real estate, and thus prices will rise, not fall. Prices fall during recessions, not during times of growth. Rental rate increases may slow down as more people shift from renting to buying in the future, but as a landlord you win either way. Interest rates stay the same and more people will rent driving up your income from rents. Interest rates start to go up and more people will buy, driving up your property’s value.