Author of Burn Your Mortgage expects interest rates to gradually rise in 2018
Sean Cooper was one of the most talked about Canadian home owners in the news when he paid off his 30-year mortgage on a new $425,000 house in just three years. He saved $100,000 in interest payments by age 30 and released Burn Your Mortgage, which sells in bookstores today.
The Bank of Canada prime lending rate was at a record low back then. But in January Canada’s five biggest banks all hiked their interest and mortgages rates. Today, Cooper’s mortgage payments would be $443 higher a month, and the rate of interest charged on his mortgage would be 3.59% instead of the 3.04% he paid through First National Financial.
“I’d rather save $100,000 of my own money in interest payments, thank you very much,” says Cooper. In 2012 he chose a five-year fixed-rate mortgage and made a whopping down payment of $170,000 on a renovated three-bedroom bungalow. He then owed $255,000, which he paid by working two jobs and renting half of his house to tenants.
“Buying in today’s market I couldn’t qualify for the same type of home I bought in August 2012,” says Cooper. “Today I’d have to move down the property ladder.
“Before the new rules on mortgage stress tests came out last month, some home buyers could afford a detached or semi-detached home. But now they can probably only afford a townhouse or condo.”
The stress test Cooper talks about helps mortgage brokers plan for a buyer’s worst-case scenario—such as a rise in interest rates or the loss of a job and suddenly unaffordable mortgage payments.
In January Canada’s top banking regulator developed a rule for stress-testing home buyers to who want to qualify for a mortgage with a down payment of more than 20% of their home’s value. Before January, only home buyers who paid between 5 and 19% were stress-tested.
Unless you have debt from credit cards and personal loans, Cooper believes now is the time to buy a home before interest rates rise yet again. “I don’t have a crystal ball on interest rates but it looks like they could rise three times this year.
“If you are a home buyer facing your first mortgage payments, then you might want to start with a fixed-rate mortgage and lock your interest rate in, since interest rates are expected to rise,” he says. The interest rate will stay the same during the life of the loan. With an adjustable or variable-rate mortgage the interest rate changes as interest rates rise.
“Many people think that five-year fixed-rate mortgages are the only option open to them, adds Cooper. “But there are one, two or three-year fixed rates and different types of mortgages.”
Loans Canada urges Canadians to shop for a mortgage since mortgage rates can vary from one lender to the next. The company suggests you try to negotiate your rate but only with a copy of your credit report, which summarizes your credit history.
Your credit report is available from Equifax Canada or TransUnion, and you can take it to your mortgage broker to try to increase your score or dispute any reported errors for a better mortgage.
“I’m amazed at people who apply for a mortgage and are shocked at the things on their credit report,” says Ellen Derrick, a financial planner at Kelly Realtors. “They say, ‘I had no idea I forgot to pay my Best Buy card.’”
“Don’t automatically accept the five-year fixed-rate mortgage with one of the big banks because the penalties are very onerous if you break them,” advises Cooper. “In my book I state that 78% of buyers break or renegotiate their five-year fixed- rate mortgage before the end of their mortgage term. And some of the penalties can be $20,000 to $25,000, which is the cost of a car.”
It’s fine to start with a five-year fixed-rate mortgage if interest rates are rising.” But you may want to find a better deal—and a different lender—near the end of your mortgage. Depending on the type of mortgage you have there can be penalties if you pay off your mortgage early.
If you’re planning to renew your mortgage, then your rates will be higher now, especially with mounting interest rates. Higher rates mean more of your money will go toward interest payments and less toward your principle. As a financial planner, Cooper tells homeowners to budget, track their spending and see what they can afford.
“Come time to renew your mortgage lenders are betting that you won’t want to switch lenders,” notes Which Mortgage, Canada’s only independent mortgage website, which states, “It’s much easier and more convenient to simply accept your first lender’s terms. But you could be leaving thousands of dollars on the table because you can probably find better rates and more flexible terms elsewhere when you renew.”
“It’s important to be cautious as some lenders post artificially inflated rates and then offer a lower rate or a higher rate once a customer starts the conversation,” reveals John Tarnowski, ATB Financial’s vice president, Retail Financial Services.
Mortgage pricing is psychological and banks often offer a low rate to get you in the door to meet with a lender. Or they may advertise a high rate then drop it some when they see you. Walking out with a lower mortgage rate than the one they advertise is designed to make you feel good. “At ATB, the rates you see are the rates you pay since we have no bull mortgages,” Tarnowski explains.
Cooper says the jump in interest rates will motivate some home-owners to pay off their mortgage fast like he did. “I worked between 70 and 80 hours a week while paying down my mortgage. You don’t have to work as many hours as me, but you should be willing to do what it takes to achieve both your short and long-term goals.”
Cooper suggests home owners manage their time to further their goal of burning their mortgage. For couples with children, working part-time or over-time to earn extra money for their mortgage may not be possible. But if you’re single, you can work to pay your mortgage off fast.
One final tip: consider paying your property taxes yourself rather than through your lender with your mortgage payments. Lenders often collect more than the estimated annual property taxes to cover any possible fluctuations and tax increases. Your saved property tax money goes into escrow account and in the time it’s there, you’ll earn little or no interest as the surplus rolls over year after year.
