Okay, so 2020 smacked us upside the head. It surprised everyone, and it changed the rules when it comes to how to choose a mortgage in 2021 and beyond. The conversation around variable vs. fixed mortgages has changed significantly as has our opinion on choosing a mortgage.
In this video Nolan Matthias of Mortgage360 discusses his seven rules to choose a mortgage in 2021.
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Today we’re going to give you some universal rules for picking a mortgage type and term in 2021, and at the end of the video I’ll give you the mortgage I would pick for myself if I was buying a new property this year.
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So rates are at an all time low, they are 1.5% lower than last year, so there’s never been a better time to get a five year fixed right? Well, think again. Because 2020 changed all the rules for selecting a mortgage.
Okay, so the question is do we want a fixed rate or a variable rate. Well that leads us to rule #1.
1. Always choose the mortgage with the most flexibility because 2020 proved we just can’t predict the future. What does it mean to have flexibility – well you want to choose the mortgage with the lowest penalty which is almost always going to be a variable or a short term one or two year mortgage. You also want to make sure you have the ability to switch lenders for better deals, and believe me there are going to be better deals available in the future. Being able to change things up is the name of the game in 2021.
2. For rentals always choose a variable rate. Why?
1. Because it is an investment so we can afford to be a little bit more aggressive with the mortgage we choose.
2. Because the penalties are way cheaper. And when we make an investment we want to make sure that f we want to or need to liquidate it we can do so without giving a whole bunch of money to the bank.
3. Rule number three is that we no longer want to pick the mortgage with just the lowest rate, we want to pick the mortgage that has the best balance between flexibility and a great rate. This means no more 5-year fixed mortgages, but it also means making sure your variable rate mortgage isn’t one of the discount variety. That leads us to rule #4
4. Stay away from “discount” or “no frills” mortgages, they often have little surprises like restocking fees that make them more expensive in the long run and also limit your options. If you google lowest rate mortgage on the internet, it is almost certainly going to be a discount option. The savings is going to be about a cup of coffee a week, but it will limit you from saving thousands down the road.
5. Always consult a knowledgable broker. Things like how penalties are calculated and restrictions are hard to pick out of a mortgage document. For example, one lender in the industry charges a three month interest penalty at prime rather than at the rate that the client is actually paying on their variable rate mortgages. This can mean thousands of dollars more in penalty costs, but this isn’t something the average consumer is going to pick out of 15 pages of fine print.
6. If you don’t take my advice and do decide to get a fixed rate mortgage, make sure it isn’t with a bank. You want to get it from a company that specializes in mortgages and has low payout penalty calculations. Again you are doing this so that if rates go down even further you have the option to refinance and lower your rate.
7. Review your mortgage options like your stock portfolio. Check in on the market quarterly and if it appears that rates have gone down more that 0.5%, check in with your broker to see if you can save money by refinancing.
As for what mortgage I would choose. In 2021 I would choose a variable rate. WIth the Bank of Canada advising that rates will likely go up in 2023 I wouldn’t want a 5 year fixed and risk having to renew into higher rates. No, I would choose a variable and consider locking in when rates do start to go up so that I can extend my low rate runway. I mad a video on that that I will link up here.
So in conclusion, 2021 is the year of the variable rate mortgage. Don’t be a sucker who pays a premium for the perception of the security of a five year fixed only to get stuck renewing into a way higher rate 5 years down the road.
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