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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 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 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 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 the proper training 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 fluctuations 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 are not familiar with how this works, you will end up paying too much for your total mortgage costs.

Next, you have to understand the rules of interest rates:

• Interest rates reflect inflation. If there is an increase in the consumer price index, interest rates should increase.
• Interest rates are tied to a country’s economic performance. A strong economy will mean higher interest rates, since there is a higher demand for money, and a weaker economy will mean decreased interest rates, since the demand for money will go down.   It is also important to understand the rules of interest rates.

Trying to predict interest rates is next to impossible.  Interest rates over the last thirty years averaged 9.26%, whereas they are now at about 5%. With this rate, you may choose to take out a 5 year fixed rate home loan. Remember, by doing so, even without realizing it, you have chosen a mortgage strategy, and this one could be a disastrous one. Refinancing every five years in the recent interest rate environment would have cost a fortune.

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

He may decide among the following strategies:

• A five year fixed term loan that is renewed every five years.
• A fixed rate loan for 10, 20 or 25 years.
• A variable rate loan based on the Bank of Canada base rate.
• Using the Smith Maneuver where the borrower can deduct interest from income tax.
• Using the equity in a residence to supplement retirement income.
• Calculate the cost differences between renting while saving for a down payment, or opting for a no down payment loan.
• Using a loan to improve a credit score for an eventually cheaper loan.

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

That’s what a mortgage broker will do when he meets with a client. Each person’s individual requirements and dreams 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.