I’ve met many people, my own parents included, who easily recall paying 19%, even 21% on a mortgage. That’s not a typo, mortgage rates actually soared that high in the eighties. The intensity of that period led to rate sensitive consumers, who in turn, reared a generation that isn’t just rate sensitive, but rate obsessed. However, there’s more to a mortgage than just the interest rate.
Yes, I said it. Stop rolling your eyes. Let’s face it, by comparison, 4%, 5% even 6% is a pretty dreamy deal. Canadian banks, while competitive, have pretty similar mortgage rates. One bank may offer you 4.5% while the next strikes back with 4.45%. You pat yourself on the back because you secured a good deal. Yes, you got the better rate. On a 25 year, $200 thousand mortgage at 4.5%, your balance after five years is $175 592. $175 447 is your balance with a 4.45% rate.
When you buy a house, you haggle over the offer; kicking it back and forth a couple times with scratches, changes and initials. The buyer may accept your closing date, but wants more money because of it. You lower the price by taking out the appliances. Back and forth, give and take, until you reach a deal. You sign the deal knowing exactly what you got and what you gave up for your price.
Buying a mortgage is much the same. The interest rate is the price you’re paying. What features come with it? If the price is lowered, what are you giving up? Let’s say the 4.5% mortgage allows payment increases, and the 4.45% mortgage doesn’t. Now increase the 4.5% payment by merely $10 month. After five years, your mortgage is $174 921.74, thanks to that payment increase option.
Would you buy a car without power steering, just to get the cheaper price? Probably not, but you would decide which features were “must have” and expect to pay accordingly. If you do some mortgage shopping, you might be surprised at all the money saving features they come with. Payment increases and prepayments are just the beginning. More banks are now offering longer fixed rate terms; up to 10 years. Weekly payments, biweekly, monthly, bimonthly, even skip a payment options are available. Shorten your amortization to pay off your house quicker, or if you’re facing a cash crunch, increase it to 35 years for a lower payment. Let’s not forget the bonus perks and special offers being added to mortgage offers. Free chequing accounts, free appliances, even free groceries!
We are long past the days of being at the mercy of the banks. Mortgages are a product we buy, and interest is the price-tag. Of-course mortgage rates are important, but before you get dazzled into a “great-rate”, read the fine print. After all, you only get what you pay for.