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 concentrate on 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!)

How do you find the right mortgage strategy? You can’t. You have to enlist the help of a professional who can create the strategy for you. Why is this? First, you don’t know where interest rates are going in Canada. Second, you have have a complete understanding of current and future economic factors. And thirdly, you need to design a strategy that is individualized. For all of this, you need a professional mortgage specialist.

All of these issues, 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 given period of time, and the remain stable for a given 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 mortgage costs.

Interest rates follow two rules, one, that interest rates are indicative of the inflation rate, and two, that interest rates are closely linked to the economic performance of a country. What does this mean? If the inflation rate(the consumer price index) goes up, rates will go up, if the economy is strong, interest rates will go up. (Of course, the opposites are also true.)

The exact prediction of interest rates is next to 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.

Mortgage brokers (courtier hypothécaire) have a number of mortgage strategies that they structure and customize for each borrower. A professional such as this will look at each option and find the right one for his customer.

The basic mortgage strategies are:

• A five year fixed term loan, renewed five times (5 times 5)
• A 15, 20 or 25 year fixed rate mortgage (Long term).
• A mortgage with an interest rate that varies, based on the Bank of Canada base rate. (Variable rate)
• Deduct interest paid on the mortgage from personal income tax (Smith Maneuver)
• Use the equity in the home to supplement retirement income. (More retirement)
• Calculate the difference between saving for a 5% down payment while paying rent and taking out a larger loan and avoiding rent during that period.(No down payment)
• Fix credit using a mortgage in order to establish better credit later on. (Less than perfect credit)

Using the correct one of these strategies in each borrower’s 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 consultant (Intelligence Hypothécaire) can result in paying too much. A consultation is free, not having a consultation is very expensive.