1. Balance Sheet vs. Non-Balance Sheet Lender
There are two different types of lenders that exist in Canada; Balance Sheet Lenders and Non-Balance Sheet Lenders. A “Balance Sheet Lender” is any chartered bank in Canada. They are referred to as “Balance Sheet Lenders” because they hold your mortgage on their books as an asset. These Lenders can only increase the value of their asset (your mortgage) by increasing the spread between their cost of funds and the rate at which you pay interest on your mortgage. A “Non Balance Sheet Lender” is a mortgage servicer that has the same motivation as you, they want you to be their client and stay as their client based on rate alone. Since your mortgage is guaranteed by the Canadian Government there is only one rate that you can be charged, there is no ability for the lender or servicer to increase your interest rate, and due to the efficiency of the market they cannot make more money by selling you a higher rate when you lock into a fixed rate mortgage from a variable, or when you renegotiate your mortgage at maturity.
2. Variable Rate Mortgages are Great, Inflation is Nowhere to be found!
Historical trends have indicated that variable rate mortgages have been significantly and consistently well below fixed rate mortgages. In response to recession in 2008 the Canadian Government lowered their Prime lending rate in an attempt to encourage spending. Since 2008 we have seen a period of extremely low interest rates. Although interest rates will rise at some point in the future and exceed current rates this will not be happening for some time. The Bank of Canada recently reported that they had no intentions of increasing rates until the end of 2013. Here is a recent MacLeans article on the subject.
3. Banks Are Not On Your Side
Over the past two years the Chartered Banks in Canada have been advising the public and their potential clients to choose fixed rate mortgage products despite the fact that variable rate mortgages have been consistently at much lower rates. The reason for this is simple; the banks offer their best rates to new clients and “reward” their existing clients with uncompetitive rates due to the penalties and hassle associated with switching to a new lender which they use as leverage to keep you around. By working with a mortgage broker you will have someone who is on your side and is working to put you into the best mortgage product possible with a lender who rewards your loyalty by always offering you the lowest rate when you renew or refinance.
4. It Might Not Make Sense to Insure
Mortgage insurance is a reality that many Canadians must face if they are not able to put down 20% of the purchase cost of their home as required by the Canadian Mortgage and Housing Corporation (CMHC). The premiums charged by the CMHC are added to the value of the loan and start at 1.75% and go as high as 7.00%. These can be quite a deterrent for a lot of home buyers, especially if the buyer only plans on owning the house for 1 or 2 years. There are alternatives available if mortgage insurance does not make sense for you and your financing situation and we would be glad to go over this with you.
5. Making your Mortgage Tax Efficient
Tax efficient mortgages are a great way to drastically reduce the repayment period of the loan but there are a few extra steps to make this happen. In order for your mortgage to become tax efficient you will need to have a mortgage product with a secured line of credit built into it. We have extensive experience in setting this type of mortgage up for our clients and can guide you through the process step by step and put you with a team of mortgage and investment professionals to help make all of your decisions easier.
6. Pay Attention to Your Mortgage
Our team of mortgage professionals are dedicated to savings our client’s money, which is why we constantly monitor Prime lending rates and economist predictions regarding rates. By doing so we are able to advise our clients when it is beneficial to switch mortgage products to get a better rate and product features or lock into a fixed rate if variable rates are no longer favourable. Our calculations are comprehensive and account for the penalties associated with breaking your mortgage early and more often than not there is considerable savings to be had by many of our existing clients wishing to refinance.
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