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Variable vs Fixed Mortgage Rates

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Where does mortgage money come from? What is the best fixed vs variable mortgage rates?

The variable rate mortgage and the fixed rate mortgage are very different in terms of how they are funded. Fixed mortgages are bonds purchased by a mortgage lender, sold as a mortgage to a home buyer and then re-sold as a income based security back to the financial market.

Variable mortgage rate products are based on the prime lending rate. This is a fluctuating yard stick used by the Central Bank in Ottawa to determine borrowing rates on all loans in Canada.

It is impacted by the value of the dollar relative to other currencies and it regulates the amount of money that is being bought by the chartered banks from the federal reserve to service Canadian borrower’s needs. The strength of the economy and the inflation rate determines the level the prime rate is held at when the Governors of the Bank of Canada meet every few months.

Due to the economic crisis in 2008, governments around the world, including Canada, have agreed to hold their prime lending rates low in order to keep borrowing costs attractive to consumers. This measure has been responsible for economic growth in all of the major industrial countries for the last five years and has helped stave off a deeper recession than what would have been experienced otherwise.

Like in all things however there is a consequence. The result of low rates in Canada has been positive for Canadian’s purchasing real estate as it has extended affordability of housing drastically. Recent changes to the lending practices of Canadian lenders has been required so that the housing boom does not become a bust as values exceed a reasonable level.

These measures include reductions of amortizations, tightening of borrowing rules for self-employed, and requiring variable mortgage rate shoppers to qualify on a prescribed rate of 5.34 per cent.

Presently, mortgage rates are in the range of 2.6 per cent for variable mortgage rates and 3.49 per cent for the best 5 year fixed mortgage rates. Before knowing which product to chose you must understand how they work.

Fixed Mortgage Rates

Fixed mortgage rates are based on bond futures. They are a fixed contract where your payment does not increase for the duration of the term. You are “locked in” to a given rate and protected from rate fluctuations or increases. This is the mortgage most recommended for the following reasons;

– Clients are risk averse.

– They have bought a property at the high end of their affordability range.

– Clients are not knowledgeable about borrowing and are more advised to take something secure.

– You can maximize your borrowing capacity with low 5 year fixed mortgage rates of 3.49 per cent, versus qualifying at a prescribed rate of 5.34 per cent.

Variable Mortgage Rates

What are the best variable mortgage rates in Canada? What are open variable mortgage rates? What is a variable mortgage?

Variable mortgage rates, by definition, can change with market conditions at anytime. They are less expensive at this time as they represent today’s cost of funds whereas fixed mortgages take a long term view with the understanding that rates will rise over time.

Variable mortgage rates are based on Bank of Canada prime rate less a discount. For example;

– Prime Rate Canada of 3 per cent less .40 per cent is a borrowing rate of 2.60 per cent. 

– Variable mortgage rates have an early renewal feature which allows you to lock into than prevailing fixed terms at any time. It is a parachute into a fixed rate product should you feel the need.

– Variable mortgage rates are more risky as the opportunity and timing of the lock in is up to the customer. Long-term rates based on the bond market will leap up well in advance of a change in prime lending rate as professional financiers make decisions on bonds well in advance of newspapers following the story. For example, the recent run-up in fixed mortgage rates in June from a 2.89 per cent, five year fixed mortgage rates to 3.59 per cent happened in a matter of weeks. People who had variable money then would have been well advised to lock in prior to the run up, but likely missed the opportunity.

– Variable mortgage rate borrowers must qualify based on a rate of 5.34 per cent due to recent rule changes. This may make a variable mortgage rate unattainable for many first time buyers.

Analysis

Variable mortgage rates are a good product if you have owned before and can tolerate the risks of not locking into a fixed mortgage rate, which are still at historic lows.

They are a good choice if you can afford a shock of a much higher variable rate later should you miss the opportunity to lock into a fixed mortgage at a timely moment.

Variable mortgage rates are less expensive but only relative to what is available in fixed term mortgages at closing. Pundits will advise that the variable rate is always a better choice although that is only true in the last five years as rates declined due to government intervention.

I believe the rate cycle is moving upward. As a historic perspective, the Canadian prime rate is typically in the 5 per cent range in a healthy economy. In the end, the decision to take a 2.60 per cent variable rate is a good one provided rates remain low for some time in order to save on interest costs, while not missing the golden opportunity to lock into rates in the 3.49 per cent range. When rates do trend upward, it will be a permanent move to rates in the 5 per cent range.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

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‘Don’t give up’: Ottawa Valley realtors share statistics, tips for homebuyers in ‘extreme’ sellers market

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The real estate market in the Ottawa Valley can be summed up this way: people from far and wide are in a buying frenzy, but there’s hardly anything to buy at the “store,” and the limited inventory is overpriced.

This “stampede” — as one realtor described it — will affect rural towns as residents grapple with finding affordable housing and agonize over their inability to purchase homes in their price range.

“We are seeing a lack of inventory in all price ranges,” said Laura Keller, a real estate agent from Carleton Place. HomeYou’ve been selected.Only $1.49/week for your first 4 months.Special offer just for you. Unlimited access.

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10 Tips For First-Time Home Buyers

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Buying a home for the first time is exciting and a commitment to the future. It’s often challenging, too, and the process requires a lot of steps, many of which can be tricky to navigate as a first-time home buyer.

What are some things you should keep in mind as a first-time home buyer?

First-Time Home Buyer Tips

Here are 10 tips to keep in mind as you begin your journey toward homeownership.

1. Have Your Finances in Order

It’s wise to begin saving as early as possible once you’ve made the decision to purchase a house. You’ll need to consider the down payment, closing costs (which often range from 2% to 5% of the down payment), as well as move-in expenses.

You also need to understand the other costs of homeownership, such as mortgage insurance. property taxes, utilities, homeowner’s insurance, and more.

2. How Much Can You Afford?

Knowing how much you can realistically afford in a home is another important financial consideration. Look for the home of your dreams that fits your budget.

One way to avoid future financial stress is to set a price range for your home that fits your budget, and then staying within that range. Going through the preapproval process will help you understand what price range is realistic for your budget.

3. Make Sure Your Credit is Good

Another thing to keep in mind as a first-time home buyer is your credit score because it determines whether you qualify for a mortgage and affects the interest rate that lenders offer. 

You can check your credit score from the three credit bureaus – Experian, Equifax, and TransUnion.

This is another good reason for getting preapproved before you start your search. Learn more about the preapproval process and your credit score.

4. Choose The Right Real Estate Agent

A good real estate agent guides you through the process every step of the way. He or she will help you find a home that fits your needs, help you through the financial processes, and help ease any first-time buyer anxiety you may have.

Interview several agents and request references.

5. Research Mortgage Options

A variety of mortgages are available, including conventional mortgages – which are guaranteed by the government – FHA loans, USDA loans, and VA loans (for veterans).

You’ll also have options regarding the mortgage term. A 30-year fixed-rate mortgage is popular among many homebuyers and has an interest rate that doesn’t change over the course of the loan. A 15-year loan usually has a lower interest rate but monthly payments are larger.

6. Talk to Multiple Lenders

It’s worth your time to talk to several lenders and banks before you accept a mortgage offer. The more you shop around, the better deal you’re liable to get – and it may save you thousands of dollars.

7. Get Preapproved First

Getting a mortgage preapproval (in the form of a letter) before you begin hunting for homes is something else to put on your checklist. A lender’s preapproval letter states exactly how much loan money you can get.

Learn more about the preapproval process and how preapproval provides you with a significant competitive advantage in our article How Preapproval Gives You Home Buying Power.

8. Pick the Right House and Neighborhood

Make sure to weigh the pros and cons of the different types of homes based on your budget, lifestyle, etc. Would a condominium or townhome fit your needs better than a house? What type of neighborhood appeals to you?

9. List Your Needs and Must-Haves

The home you purchase should have as many of the features you prefer as possible. List your needs in order of priority; some things may be non-negotiable to you personally.

10. Hire an Inspector

Hiring an inspector is another crucial step in the home buying process. An inspector will tell you about existing or potential problems with the home, and also what’s in good order. You can learn more about home inspections and how to find a home inspector through the American Society of Home Inspectors website.

Buying a home for the first time is a challenge, but it’s one you can handle with the right planning and preparation.

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A Simplified Guide for Toronto First-Time Home Buyers

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Toronto is the largest city in Canada, the fourth largest city in North America, which makes it an exciting place to live in.

But as with other major cities, finding the perfect place to move to can get tricky. If you’re planning on buying a home for the first time in this city, it is indeed a big decision and there are things you should know in advance.

Don’t worry, this guide will help explain the basics of what you as a buyer should know when you decide to buy a home. It will make you feel like a true expert during the buying process.

Decide what type of home you are looking for

There is no right answer to what makes a good home. It all depends on your preferences and needs as the resident. It is, therefore, a good idea to determine as early as possible which features of a home are important to you. If you are buying a home and moving in with someone, it can be a good idea for both of you to make a list and compare.

Toronto is a city that offers different styles of living accommodations and its neighborhoods are quite versatile and diverse, same as the people living there who come from all parts of the world.

The most common forms of housing and real estate opportunities in this city include bungalows, two-storey houses, split-level homes, and the very popular Toronto condos. Due to the high property values, the city boasts of construction of many condominiums as they are a more cost-efficient choice and provide a plethora of benefits.

When you decide on the type of home you want to buy, it is good to do some research and learn the biggest differences between them.

What to think of when choosing homes in Toronto

There are certain things you need to consider when choosing your home in this city. 

Being close to the things you need to visit every day makes life a lot easier. Pay attention to the proximity to shops, preschools, schools, and your job. In addition, access to good public transportation is crucial. Being able to move around the city easily and the opportunity to commute is important to many.

Know that having a balcony can significantly increase the value of your home and improve your well-being. Being able to move easily in the area is something that many people underestimate, but can be very convenient, and this is why you should see if there are good cycles and walking paths. 

And finally, make sure that the house is well designed which is a quality that does not disappear with the age of the house or with renovations. 

Set your budget

Before you start the search for your new home, you must know how expensive of a home you can buy. It is preferable to know in what price range to look for. The budget is usually decided based on your mortgage and how large are the monthly costs you can handle.

A mortgage is always about a balance between risk and income for the bank. The higher the risk for the bank to lend to a particular home, the more expensive the mortgage will be. When it comes to the bank’s reasoning when applying for a loan, it is in principle always a question of whether you as a borrower will be able to repay the mortgage.

The bank also takes into account your financial history. If you are a person who has managed your finances well, the chance increases that you will get your mortgage approved. If, on the other hand, you have a bad reputation with banks, it is weighed in as an aggravating circumstance.

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