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One of the most important 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 can be very low. (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 join forces with a professional who can create the strategy for you. Why is this? First, you don’t know what interest rates are going to do in Canada. Second, you have to fully understand 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 consultant.

With the expertise of an experienced mortgage professional, the two of you can sit down and design the exact product that will work for you. You see, he has been trained to know and understand each of the mortgage products (prêts hypothécaires) on the market, and know how each one would apply in a given set of circumstances. In addition, he understands the economy in general and probable impact of interest rate trends over the projected life of your mortgage.

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 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 do not understand 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 reflections 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.)

Predicting interest rates is nearly impossible. Over the last thirty years interest rates have increased, averaging 9.25%, but recently have been decreasing and are now approaching 5%.  At this level, you may think about a fixed rate mortgage for five years. But that strategy has been the most costly over the past decades.

Which strategies do professional mortgage consultants (courtier hypothecaire) look at? There are a number of basic strategies, and an informed mortgage broker will consider any of them, and even design a customized one that is a combination of two or more.

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)
• Repair credit using a mortgage in order to establish better credit later on. (Less than perfect credit)

Good mortgage planning (Intelligence Hypothécaire) and finding the right mortgage strategy in each case is what a mortgage broker will do in order to save mortgage expenses, sometime as much as 20 times or more, over the life of the loan.

Analyzing each of these strategies on its own is important, and then the borrower’s individual circumstances must be considered, as well as the general economy of the country. Not using a professional mortgage (prêts hypothécaires) expert to do these analyses can be dangerous and expensive.  The best decision you can make is to contact a mortgage specialist to assist you; this free consultation may be worth a fortune!