It’s been a full year since the global economy nearly collapsed, sending stock and real estate markets into a tailspin. In that time governments, companies, families and individuals have all made changes to how they approach financial decisions and how they plan for their financial future.
Despite conflicting and ever-changing economic news, one thing is certain – any recovery that is being seen in the Canadian economy is minor and tenuous. While real estate in the Toronto area has proven resilient, the same cannot be said of Vancouver, Calgary, or other major real estate areas. Unemployment is high, inflation remains low, all levels of government are running deficits, and consumer spending remains cautious.
In this continuing uncertainty only one thing has remained consistent – record low interest rates. The Canadian federal government has committed to leaving the overnight rate at an historic low of 0.25% until June of 2010, and the resurgent stock market has resulted in low or decreasing bond yields leading to consistently low mortgage rates. These low rates will likely continue for the next six to eighteen months as the Canadian and American economies struggle to regain a sense of confidence and realize consistent and tangible growth.
Record low rates make it an ideal time to enter or move up in the real estate market. The first step for any potential buyer is to get pre-approved by an experienced mortgage specialist. A pre-approval will guarantee a rate for up to 120 days, allowing buyers to take their time shopping, secure in the knowledge that they will not be paying more than a certain amount of interest.
Locking in a low rate does NOT, however, mean locking in for a long term. Only a small portion of homeowners stay in the same property more than three years, and many homeowners who locked in over the previous two years – when rates were at another very low level – ran into expensive penalties trying to modify or break their 5-year terms.
Mortgage products should be tailored to an individual buyer and their resources, needs, long term plans and tolerance for risk. For most homeowners, variable products and shorter terms offer flexibility that allows them to not only pay the least amount of interest possible, but also create more equity while allowing owners to adjust to unforeseen changes, both positive and negative, that can influence where you live, what you can afford, and what you plan to do there. If a homeowner prefers security, they can always pay a premium to lock in for a longer term, but a good mortgage specialist will advise them of both the benefits and the risks that approach can involve.
Ultimately, the best way to take advantage of these record low rates is to get an honest and thorough perspective on your financial situation, then develop a plan that best suits your goals and needs. Don’t simply fall into a long-term mortgage, or spend more than you can afford, because ‘you’ll never have this opportunity again’. Take some time in advance to determine what you can do, why you want to do it, and what it will really cost over the next several years. Yes, rates will go up again, but by how much, or for how long, nobody can say. Take advantage of what you know now to better prepare yourself for when rates do eventually rise, and you will be in the best position possible to make your plans come through! -GS
