How to find the rate mortgage when interest rates are high

Buying a home is no doubt an exciting and memorable experience. However, it also comes with a ton of emotion and key decision-making, including finding the right mortgage. In this high inflation, high-interest rate environment we’re living in, it can feel like our financial decisions have more weight than usual. The good news is that there are a handful of key tips you can consider in your search to make an informed decision with confidence.

Fixed- versus variable-rate mortgages

Choosing between a fixed- and a variable-rate mortgage is foundational. Fixed rates are often a popular choice as buyers benefit from a consistent interest rate and monthly mortgage payment during the mortgage term. For example, if you opt in for a five-year fixed-rate mortgage with an interest rate of 5.2 per cent, this rate and your monthly mortgage payment will remain the same for the entire term. This predictability is not only essential for your financial planning and budgeting, but it provides a level of stability that is extremely helpful in an environment where interest rates and cost of living are at an all-time high. Conversely, variable rate mortgages have interest rates that fluctuate based on market conditions. While your payments remain constant, the amount of interest paid can increase or decrease over time. It’s also important to note that variable rates carry smaller penalties for early terminations. While many are concerned with variable right now, some may choose a variable rate mortgage in a higher rate environment, as they believe rates will come down (potentially substantially) during their term. So, they are willing to take the risk for the potential savings.

Prepayment privileges and penalties

When searching for a mortgage, the idea of paying it off early might not cross your mind. Yet, before making any decisions, it is worthwhile to consider the potential savings that could come from making extra monthly or yearly lump sum payments. However, the only catch is that your mortgage terms and conditions need to allow for these additional payments, otherwise known as prepayment privileges. These privileges are outlined in your mortgage contract and specify the number of additional payments you can make, how often you can make them, and how much you’re allowed to pay off in advance without penalty. Understanding these terms can help you determine if it makes financial sense to make additional payments.

After reviewing the prepayment privileges, familiarize yourself with potential penalties in your contract, especially if breaking your mortgage is a possibility. Different mortgage options and lenders have varied penalties, some costing as much as tens of thousands of dollars.

Look beyond the interest rate

In a high interest rate environment, it can feel almost impossible to think of anything else. Although your mortgage rate is certainly important, it is not the only factor to consider. If you solely focus on rates when shopping for a mortgage, you might miss out on valuable features that could actually save you money over the long term. While a lower rate may save you a few hundred dollars, the length of your mortgage and prepayment privileges have the potential to save you thousands.

Pro-Tip: Even though a five-year fixed-rate mortgage might offer lower rates now compared to shorter terms, it could cost more in the long run if interest rates drop as expected.

Expand your search and shop around

In addition to the big banks, credit unions and monoline lenders are gaining popularity due to their competitive products, lower rates and more lenient penalties. In this market, they also provide better chances of approval for borrowers. Navigating the homebuying process in our current high-interest rate market might feel daunting, but with the right information, you can make sound decisions. From understanding mortgage types to shopping different lenders, being informed is your biggest asset. With knowledge and the right mortgage professionals by your side, you can find the right mortgage that supports your financial future.