- Hey, it's Nolan Matthias from Mortgage360,
and the Bank of Canada just dropped
their overnight lending rate by 50 basis points.
But that doesn't help you
determine which mortgage you should select.
So today we're gonna give you some
universal tips on how
to select a mortgage in 2020.
And at the very end,
I'm gonna tell you exactly
how I would choose a mortgage for myself.
If I was purchasing a property
or refinancing this year.
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So the Bank of Canada
lowered it's overnight lending rate.
And obviously everyone's thinking,
"Yes, it's time to get a variable rate.", Right?
Because obviously, variable rates are affected
when the Bank of Canada
lowers rates, not fixed rates.
Okay, so quick sidebar here.
Variable rates and lines of credit
are what's affected when the Bank of Canada
moves rates and
subsequently, When the banks
actually move their prime rate.
Fixed rates are usually affected
by the bond market.
Which runs independent of
the Bank of Canada and the Federal Reserve Bank,
But somewhat correlates.
Now correlates isn't causal.
So in other words,
the rates tend to move
fairly similar directions.
But it doesn't necessarily mean
that just because
the Bank of Canada lowers rates
that fixed rates are going to lower
and vice versa.
That's why sometimes
you have variable rates
that are higher than fixed rates.
And sometimes you have variable rates
that are lower than fixed rates.
So they move together, But independently.
When the Bank of Canada lowers interest rates,
What we're usually talking about
is variable rates and HELOCs
that are affected.
Not your standard fixed rates.
Now that being said,
fixed rates have been trending down.
But that's because of
what's going on in the overall economy.
Ah, squirrel.
There was actually,
literally a squirrel there.
Like when I said squirrel,
There was a squirrel.
I could see it out the window.
Okay, so then the first question is
do we want a fixed rate or a variable rate?
Well let me give you some rules
to help decide.
Let's start with rule number one.
If you're purchasing a rental property
or you own a rental property,
You always want a variable rate.
Like always.
The reason why you always want
a variable rate is
primarily pay out penalties.
On a variable rate it's always gonna be
a three month interest penalty.
Well, almost always.
But 99% of the time,
It's gonna be a three month interest penalty.
And that's the cheapest form of a penalty
you can get.
The reason why you wanna make sure
your penalties are low when
you own a rental, Is because if you
ever have to liquidate it or sell it.
You definitely want to have the ability
to get out of the mortgage without
having to send a whole bunch of
your equity to the bank in the form of a penalty.
And the other reason why is,
Listen it's an investment.
You can afford to be a little bit more
aggressive with an investment than
you would want to be on your personal
residence.
So no matter what you do
on a rental property,
You always want to have a variable rate mortgage.
And that's what we do personally.
Our rental properties always have
a variable rate mortgages.
So we're not telling you
to do one thing
and doing something totally different.
What we're saying is that variable rates
are the best options when it comes
to rental properties.
And one, It's because you're more likely
to save with a variable.
And two, It's because you're reducing your
payout penalty risk.
Rule number two.
And by the way, Going forward here
most of what we're talking about
has to deal with the personal residence
and not a rental property.
But rule number two, Is always
pick the mortgage with the lowest rate.
So if it's a two year,
a three year,
a five year or a variable;
It doesn't matter which one you choose.
As long as you choose the one
with the lowest rate.
Variables are often
going to be the lowest rate.
Although the last year or two
they haven't necessarily
been the lowest rate
that you could possibly get.
But most of the time,
The variable rates are going to be
the lowest rate option.
But if they aren't,
choose the fixed term
with the lowest rate.
Right now at the time I'm recording this,
That's actually a five year fixed
which is an anomaly.
So most of our clients are choosing
fiver year fixed
and getting great deals on them.
Some of them as low as 2.54%.
Now rule number three,
Is the exception to rule number two.
And that's this,
If you can get a longer term
and pay less of the premium than
about .1% for each additional year;
Then you should probably take the longer term.
So let me break that down for you
in an example.
So let's say you can get a two year
mortgage of 2.29.
But you can get a three year mortgage
at 2.39.
We think you should take the three year mortgage
because you get that extra year
for only .1% more in interest cost.
Now same thing, let's say you can get
a two year for 2.29 and
you can get a five year for 2.59.
We think you should get the five year
for 2.59 because it's only
costing you about .3% more.
And that extra .3% per year
for the added security
between year two and year five.
And that longer duration
at that low rate
is worth in our opinion.
One of the things that we've always
told people is if you can get a
variable rate for 50 basis points
better than a fixed rate,
It's better to take a variable rate
than it is to take a fixed rate.
But if you can get a fixed rate
and only pay a little bit more;
So less than half a percent more to have that
fixed rate locked in for five years.
We often encourage clients to take that
mortgage as a security option.
Now a lot of this has to do with risk tolerance.
So how a client will feel about having
an interest rate that can vary.
But this are basically the parameters.
There's times where it definitely makes sense
to take a variable and there's times
where it definitely makes sense to
take a fixed.
But when it's harder to determine
between the two,
That's when this rules really come into play.
Rule number four is to stay clear of
discount and no frills mortgages.
Again, unless you really know
what you're getting into
and you have a reason for wanting to
take a discount or no frills mortgage.
So something that has a
no re-finance flaws in it.
Or something that you can't pay out
until the full term is over.
Make sure that you're getting a
mortgage with a ton of flexibility.
And mortgages are just like anything else.
You get what you pay for.
And when you get a really good deal
sometimes that deal is too good to be true.
So unless you really know what you're
getting into.
Avoid this no frills mortgages
and discount mortgages at all cost.
Quite often this mortgages are
high in fees
and they'll have things like restocking fees
at the end of the mortgage
they end up making it not worth it anyways.
In order to save .2, .3% you end up paying
an extra money because you didn't realize
that they were gonna get you with fees
or prevent you from being able to
re-finance into a lower rate mortgage.
So rule number five is if you're
gonna get a fixed rate mortgage,
Make sure it isn't with the bank.
Now,
that probably seems counter intuitive
but the reason why we want to make sure
that you don't get a fixed rate mortgage
with the bank is quite frankly because
there penalties are too high.
A penalty on a five year fixed with
the big bank is probably
three to five times higher
than what it would be at the
mortgage company that specializes
in mortgages.
So unless we absolutely have to take
a five year fixed mortgage with the big bank.
We encourage our clients to avoid them.
You know another thing to remember
about penalties is that if you have
a high penalty you have less flexibility.
So having a low penalty allows you to do things
like refinance later on
before rates do go down even further.
Which can end up saving a client a ton of money.
So rule number six is to always consult
a knowledgeable broker.
Listen, when you get a 15 page document
that's your mortgage, It can be pretty hard to
decipher all of the fine print.
And the only way to really know
what's happening in that mortgage is
to either read the document yourself
and fully understand exactly what's going on.
So in other words, Be a lawyer.
Or to consult a broker who understands
what's actually going on, on that mortgage.
They'll know the lenders that have the high
restocking fees and the high penalties.
And the little tricks that you know
the typical consumer wouldn't know to
look for.
I'll give you an example,
One of the lenders in the industry
charges a three month interest penalty
on their variable rate mortgages just like
everybody else.
But what they don't point out is that
the interest rate that they're charging
isn't what the client's actually paying.
It's the bank prime rate.
And what that ends up doing
is it ends up artificially
inflating the penalty.
And it can be the difference between
having a penalty
that's two or three thousand dollars.
And having a penalty
that's four or five thousand dollars .
So a good broker will help a client
by making sure
that they don't step
on any landmines that are gonna cost them
a few thousand dollars down the road.
I can guarantee you that 99% of clients
aren't gonna pick up on that
little minute difference.
But a good broker, A knowledgeable broker
will know the difference and know
that that's there.
And they'll help you avoid it by
switching you to a different lender
that doesn't necessarily charge penalties
in the same way.
And rule number seven for selecting
your mortgage is actually not so
much to do with selecting your mortgage
but what you do after you select
your mortgage.
We recommend that clients review
there mortgage like they review
there stock portfolio.
Take a look at what's going on in the market
on a quarterly basis and if you see
that rates have gone down,
Talk to your broker bank
and figure out if there's a way that you can re-finance
or lower your rate to save money.
Sometimes it's a 10 to 15 minute call
that will go nowhere.
But sometimes it might be a
10 to 15 minute call that will save you thousands.
It's one of the most simple things you can do
in order to hack your mortgage
and end up paying less overtime.
On top of all these rules
there's one important thing to remember
and that's you don't want your mortgage
to keep you up at night.
So if a variable rate strategy
even though it makes a ton of sense
isn't the right strategy for you
because you're gonna worry about
where rates go and it's gonna keep
you up at night.
Then don't pick a variable rate mortgage.
Pick a fixed.
But,
maybe pick a
short term fixed
that's at a lower rate than say the standard
five year fixed.
And you know what, sometimes you can get a really
good deal on a 10 year fixed.
So if you really, really, really want
security and you wanna know
what your payments are gonna be
for the next ten years.
Then maybe that's an option for you as well.
But more than anything we want your mortgage
to not be a stress in your life.
We want it to be the thing that
allows you to live in the house that you love.
As for what mortgage I would choose personally,
Well if I was getting a mortgage through a bank
it almost always choose a variable rate mortgage.
If I was getting it through a mono line lender
or a lender that only specializes in mortgages.
I'd pick whatever the best rate is
whether it's a short term fixed,
a five year fixed or a variable.
It's really basic math, you pick the mortgage
with the lowest rate
at the time you get the mortgage.
As I'm filming this video
the mortgage I would take
would probably be a
mortgage with the First National
or MERIX financial.
And it would probably be in the 2.5 or
the 2.64% range.
It would be a mortgage with
great pre-payment privileges,
with low penalties and with
lots of flexibility for the long term.
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