Q: I’m buying my first home—a starter home—that I plan to live in for the next five to seven years. How do I know which mortgage is right for me?
— Housing Newbie, Toronto
Answer from Robert McLister, mortgage planner with Ratespy: There are endless mortgages to choose from so get one-one-one advice when you can. In the meantime, here are four quick tips:
#1. If you plan to live in the home for five-plus years, then portability (i.e., being able to move the mortgage to a new property without penalty) is less important. But people’s plans change so don’t ignore porting features altogether. The best portability options afford you:
→ The lender’s best rates if you need to add money to the mortgage (helpful if you upgrade to a more expensive home)
→ More time to close your new mortgage after your old home sells (look for 60 days minimum).
#2. If you don’t foresee moving, refinancing or making big prepayments in the next five years, consider low-frills mortgages. You’ll get a cheaper rate in exchange for smaller prepayment privileges, bigger prepayment charges (aka, penalties) and/or a restriction on refinancing with other lenders before your renewal date.
#3. Most first-timer buyers choose a 5-year fixed rate because their finances don’t allow for much interest risk. But if you’re financially stable, have great credit and save at least 5% of your income each month, consider shorter fixed terms and variable rates. In our low-rate environment, they’ll give you extra savings.
→ If you do go variable, look for one that keeps your payment the same regardless of interest rate fluctuations. It’s easier for budgeting and gives you peace of mind if rates start climbing.
→ If you can’t decide between fixed or variable, check out a hybrid mortgage. Hybirds let you split your mortgage into two different rates (e.g., half fixed and half variable). They’re a great way to take advantage of lower rates while still protecting yourself if rates climb.
For more tips, have a peek at this mortgage checklist.
Source: MoneySense.ca by Romana King March 28th, 2016