Interest Rates Are Important, But Not The Most Important
When it comes to interest rates, an expression One Cannot See Dollars from the Pennies is frequently true… We pay attention to getting the lowest possible rate, often at the expense of our long term strategy.
I am not saying rates aren’t important, but there are other considerations as well… products, terms and conditions, etc. Rate is only one factor in determining a “good deal”.
On renewal date, banks tend to offer lower rates for straight renewals. This because there is little work involved for them in renewing a mortgage. However, if at the time of renewal you want to take out more debt or access the equity in your home, you would still need to refinance and this means slightly higher rates.
Getting a slightly higher rate often makes sense since the savings through consolidation of your debt or access to extra funds for renos or investments will offset a modestly higher rate.
Way too often we see clients who renew their mortgage taking the lowest rate only to come back in a few months’ time looking for equity access. Now they have to pay the penalty to break their mortgage in order to get the wanted product. There was no need for that!
Another example of “rate chasing” is when business owners look to increase their own incomes to qualify for lower rates on mortgages. This may seem smart, but it doesn’t take into consideration the cost of the additional income tax they’ll end up paying.
Other times I’ve seen clients ask for shorter amortization periods to get a 0.1% savings in rate. But this ends up lowing their purchasing power on any future investment property.
And the most frustrating cases we see are when clients opt for low rate mortgages only to learn that the mortgage cannot be broken (and the penalty to do so is very high).
As always, a good rate is important, but in the long run a good mortgage strategy is far more important