This text is part of the special Real Estate section
Many prospective buyers and existing homeowners are now wondering about the best mortgage to choose, experts note, as the Central Bank continues to raise rates and the specter of a recession hangs over the Canadian economy and the real estate market. .
“Where is it going to stop? This is the question that comes up most often in Jean-Philippe Fortin’s office, from both new and existing clients. The mortgage broker for the Mortgage Management Group and Associates firm at Consortium Hypothécaire can only tell them that there is no limit to the rate increase. “It’s unheard of, the increases we saw during 2022,” he says.
Since March, the Bank of Canada has made six hikes, raising its key rate from 0.25% to 3.75%. Other increases could also occur by the start of 2023.
Some customers fear the scenario where rates would rise to around 20% like 40 years ago. However, the current rate hike should not worry buyers, believes Dominic Paquette, financial planner and president of Partenaire-Conseils Financial Group. “We are far from the 18% or 20% that we experienced in the 1980s,” he says.
A fixed or variable rate?
With interest rates rising, is it better to protect your budget by choosing a fixed rate or to opt for a variable rate in the hope that it will eventually be revised downwards?
“This is the million dollar question that we have been asking a lot for several months. There is no right answer because each client has their own profile, risk tolerance and different objectives,” explains Mr. Fortin.
If the variable rate can change, the fixed rate still carries risks on its side, believes the mortgage broker. Change of job, separation, move, several reasons could lead a homeowner to terminate his mortgage before term. “The penalties for breaking a fixed-rate mortgage are much higher than the three months of interest for one with a variable rate,” he summarizes. He specifies that the clauses are not the same according to the lenders.
Mr. Fortin therefore recommends focusing on the advantages and disadvantages of each product. He also adds that rate cuts could eventually take place after the successive hikes. “There’s nothing certain about that, but economists talk a lot about a recession,” he says.
To those who would prefer the variable rate, Mr. Paquette advises for his part to pay more than the amount imposed by the bank. Thus, a homeowner whose mortgage would be $1,700 per month could choose to increase his payment to $2,000. It would then repay more capital when rates are lower and at the same time protect its budget from a possible rise in rates. “It’s been shown that, in the long term, often someone who goes with a variable rate and doesn’t change their strategy along the way is going to be a winner,” he adds.
Renew immediately or wait?
By dint of seeing rates rise since the start of the year, some homeowners could be tempted to renew their mortgage before term to avoid a potential rate hike. In many cases, this strategy would be penalizing, believes Mr. Paquette.
He cites as an example the situation of an owner who would have chosen his rate two years ago for a term of five years. “If you took it in 2020, you have an interest rate that is low, possibly very competitive. If you renew now to avoid an increase later, you will pay a lot more over the next few years”, illustrates the financial planner.
Mr. Fortin agrees. “If a customer has a rate of 2.5% and he goes to a rate of 5.5% or 6%, is it worth paying his penalty and going for a higher rate? high right away? Because if, in the end, the rates stagnate or drop a little by his maturity, he will have paid a penalty for nothing and have a higher rate as such, ”he warns.
Keep cash
Some homeowners may also be tempted to pay off their mortgage as much as possible, for lack of cash. Mr. Paquette suggests that people look at their overall situation before making a decision.
If the homeowner thinks that paying off their house is “a good thing in itself”, it’s all “a question of balance”. Thus, an individual would benefit from setting up an emergency fund and contributing to an RRSP to pay less tax. “And if you have a glitch, an illness, a job loss, a major event for which you need to have cash, I guarantee you that it is very possible that your bank will say no to you”, warns- he.
The financial planner encourages people to “keep confidence for the long term”. “Often people will rush, but safety comes at a price. You have to be really convinced that this is the right choice to make. »
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