Applying for a mortgage? Want to know more about interest rates and their impact? Watch this episode, as we discuss what is a good interest rate when buying a home. We also explore if it's better to have a shorter or longer term mortgage, especially in the current economic climate. Finally, we talk about your ability to pay a mortgage when reviewing interest rates.
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So, today I'm joined by Mujitaba Syed, [00:00:30] Mobile Mortgage Specialist with TD Canada Trust. And the question were going to answer today is:
What's a good interest rate when buying a home?
Mujtaba Syed: Yeah, that's a great question, Karl.
So, interest rates they kind of vary. The best interest in my opinion is the lowest interest rate. When you are talking to your bank, talking to your mortgage specialist, find out what's available.
Now, interest rates are technically not just the lowest number possible. It depends, sorry, on rates, terms, outstanding how many years.
[00:01:00] So, for example, it also depends on what your guys goals are and what you're expecting long term.
So, if you're expecting to sell your house within the next two years, maybe don't go into a longer term. Stick with a two year term or shorter, so you don't look at any exiting penalties or anything like that.
But in my opinion the best rate is always the lowest rate that you can get.
Karl Yeh: So Mo, what is the effect of higher and lower interest rates on when you're trying to purchase a house?
[00:01:30] So, rates are definitely just based most on term, right? So, for example, if you want to go for a different term, it could impact your rates.
We have banks that start from one year all the way up to 10 year fix sometimes.
We also have available five year variables, three year variables.
So, the best thing to do is really just have a conversation with your specialist or your lender and explain to them what your goals are, and they can advise you on what's best for you.
It's not always the best to go [00:02:00] for five year fix or five year variable. You could go for two year. You could go for a three year. You could sometimes even go for a ten year if it makes the most sense for you, but those are conversations to have with your specialist or your lender at that time.
So, in this environment though, in environment we have with the ... I remember the current, the recent interest rate hikes.
Is it better to have a shorter term or a longer term mortgage?
In this scenario right now, where five year fixed rates have gone up, economy is very [00:02:30] unstable, a lot of things are going on.
I have been really recommending all my clients look into the variable rates right now. The five year variable rates right now have major, major discounts. A lot of people worry about the five year variable rate asking, what happens if it goes up in the future? Yes, there is a potential it can go up in the future, but the discount is so big that it gives you time to react.
Every time the Bank of Canada reviews rates, it gives us time, right, and then a five year variable has provision built into the rate where you can lock in at any time without penalty for a [00:03:00] greater term than what's outstanding.
For example, if you have a five year variable, you could lock in for a three year, four year, five year fixed, whatever's available at that time without the penalties.
So, it's a really good way for five year variable today to kind of average your interest rate. So, with the five year term.
So, try to get some lower rates. It might go up. It might come down, but overall the discounts so big right now that you're going to probably do better than a five year fix today.
And remember if you want to know more about comparing mortgage rates between the banks, check out our video above for more information.
[00:03:30] So Mo,
How much does a mortgage interest rate really matter when you're buying your home?
Yeah. So, mortgage rates are probably one of the most important things. It determines where your payments are, what your pay ability is, how much you end up paying back to the bank.
All of that stuff is really just based on your interest rate.
All it has to do ... It has a big factor in playing in your decisions when who you want to lend, who you want to go with as a lender, or how much you want to borrow. So, interest rates, do like I said the lowest, the [00:04:00] better.
Is that usually the first thing that you take a look at when you're thinking about applying for a mortgage, the interest rates?
The first thing I kind of do is look at my budget. I look at to see how much can I afford because interest rates right now, most banks are going to be within a tenth of each other.
It's not going to be ... They're not going to be totally off, so I would first to see what my pre-approval is, what my budget is, and then fix a monthly budget for myself.
And then, once I know what my monthly budget is that I'm comfortable with, then see what interest rate gets me closer to that payment so [00:04:30] I know I can afford it. And then, you want to see what terms come with that interest rate to see if it's beneficial for yourself.
So, if you have more less pre-payment privileges or if you're stuck in for a long time and the exiting policies are a little bit more stricter than you might want to look at other things, but it all just really depends on where your future goals are, how you feel after speaking to your lender.
Your specialist, after listening to your goals and concerns, should be able to direct [00:05:00] you into the right direction to see what rate is best for you, what term is best for you, and then kind of go from there.
Does it make sense to also think about your ability to pay that mortgage and taking interest rate into account?
So, if you are going five year variable, you want to make sure that over that course of the five years, you can actually pay off even if the interest rate increases?
Absolutely, yeah. If you want to take a look at that, but with the five year variable sometimes you can argue the fact that there's no stopping it, right.
They could come to ... There's no maximum, [00:05:30] like if the bank account kept on raising rates. We do have to be realistic.
You could look at historical trends and see where prime was and to where it is today, but even then five year variables have provision built into it. So, you don't get sky high rates or you feel like you're stuck in and you can't get out.
Five year variable rates do have provisions of walking in for like I said a three year, four year, five year term.
Every bank, every lender will have different provisions, but variables every lender will have a provision to kind of [00:06:00] safe guard your interest rate so it doesn't go higher than what you're willing to pay or what you can pay.
Karl Yeh: Perfect. Do you have anything else to add?
No, I think the best thing to do is just have an honest discussion with your lender and your specialist, and just tell them what your goals are, and explain to them what your monthly budget is and how much you are comfortable paying.
And then, they can sit down and work out a plan with you and for you to see these are the best rates possible, and sometimes five year variables are not always the best rate.
You want to look at what [00:06:30] makes more sense for you.
I've had some clients that gone into two years for the term of their life of their mortgage, and I've kept on renewing because they were most comfortable with their two year.
So, it's not always the best just to look at what the five year. Always check what all the rates are then kind of go from there. Sometimes banks have big rate discounts available on different terms like a three year, four year, maybe even a five year, six year, and see what's best for you.
And then, once again, have that honest discussion with your specialist and lender, and they can guide you in making the right choice.
Karl Yeh: [00:07:00] Perfect. Well, thank you very much Mo. Thank you very much for joining us, and remember we have a lot of mortgage and mortgage rate videos in our playlist below in description. So, have a look at that and we'll catch you next time.
Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below.
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About Mujtaba Syed:
Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.