One of the most critical things you can do when you are considering buying a home is to choose the right mortgage strategy (hypotheque). Too many borrowers only think about interest rates, not realizing that choosing the right mortgage strategy can save them tens of thousands of dollars, while the savings on interest rates is minimal. (If you want to understand more about this concept, read How to beat the best rate!)

O.K., you say, I’ll find a mortgage strategy. This is not an easy thing to do by yourself. The issues surrounding the choice of a strategy (or combination of strategies) are complex, and require some professional knowledge. You don’t understand interest rates are going in Canada, you don’t fully understand all the economic factors that influence interest rates, and you do not know enough about mortgage products to pick the one(s) for you.  You need to call upon the help of a mortgage consultant.

All of these factors, and more, will be taken into consideration when you sit down with your personal mortgage consultant. He has been trained to understand what affects interest rates, which mortgage products (prets hypothecaires) are available as well as current economic conditions and, most importantly, he has been trained to use this knowledge as it applies to each client’s given status.

It takes years of study to understand the movement of interest rates and there are economists who specialize in only that. Here is what the layman needs to understand about the basics of interest rates:

Interest rates follow an upward trend for a certain period of time, they follow a downward trend for a certain period of time, and the remain stable for a certain period of time. We have seen this trending in action from 1950 to 1980 when interest rates were rising, from 1982 to 2003, when interest rates were falling and from 2003 to 2006 when interest rates stayed in a fairly narrow range. If you are not familiar with how this works, you will end up paying too much for your total home loan costs.

In addition to the way interest rates move, interest rates follow certain unchangeable laws.

1. Interest rates follow the inflation rate. That is, increases in the consumer price index will lead to increases in interest rates.
2. Interest rates change according to the state of the economy. In a weak economy, interest rates will be lower and in a strong economy, interest rates will be higher.

The exact prediction of interest rates is almost impossible. We have seen interest rates increase over the last thirty years, with the average rate being 9.25%.  Today, however, it is at about 5%. Perhaps at this interest rate level, you think it would be wise\a good idea to consider a 5 year fixed mortgage. But if you had done that over the recent historic period, it would have been a disaster.

There are quite a few mortgage strategies that mortgage brokers have to choose from. An expert mortgage consultant (courtier en hypothèque) can pick and choose from this mixed bag of strategies and design the perfect one for you.

Here are the basic mortgage strategies:

• 5 times 5-A fixed term five year mortgage, renewed 5 times.
• Long term-a fixed rate mortgage for 15, 20 or 25 years.
• Variable rate-a home loan with an interest rate that changes based on the Bank of Canada base rate.
• Smith Maneuver-the borrower can deduct mortgage interest from income tax.
• More retirement-the equity built up in a home is used to create retirement income.
• No down payment-calculate the cost of renting while saving for a down payment as compared to taking a larger loan.
• Less than perfect credit-use a loan to repair credit so a mortgage will be cheaper later.

Using the correct one of these strategies in each individual case is what it is all about. Using the right mortgage strategy (taux hypothecaire) is 21 times more important than getting a better interest rate.

That’s what a mortgage expert will do when he meets with a client. Each person’s individual needs and goals are discussed, and then any mortgage strategies that may be open to him are applied to his situation, under the present and anticipated economic conditions.  Not taking these steps with a professional mortgage broker (Intelligence Hypothécaire) can result in paying too much. A consultation is free, not having a consultation is very expensive.