Lets look into the Canadian mortgage market and ask ourselves: “What is the true purpose of the mortgage calculator?”
It seems like in this day and age, every major bank and lending website offers their own form of a mortgage calculator. The reason, to entice us into rates that are usually unattainable. And so the main problem with online calculators is that it causes us to set the bar too low.
Let me explain:
Clients constantly come into our office for advice on mortgage rates. We consistently ask them “what are you expecting to pay per month?” I had one client purpose a monthly payment of $850 for a $300,000 house. And just to be clear, that too is unattainable.
So we ask; “Where did you get that number? Is it based on your personal budget?”
They will then usually point out, “No, I was playing with an online calculator”
With interest rates being historically low, we find that way too many mortgage calculators cause clients to set the payment and expectations too low. Therefore, if they do get this rate of payment, they pay off less principle on their house.
One day these low rates will be history and there will be two kinds of home buyers at this point… Some that look and reminisce on how low their mortgage payment used to be. Or, others that will look back at the historic rates, and say to each other "at least we paid off all that principle while the interest rates were low"
The second group are the types of clients that Mortgage Teacher creates.
Our advice with a calculator; type in 4% or 5% interest and whatever that payment comes out to, you should be able to afford that payment when getting into home ownership. This doesn't mean you have to obligate yourself to the high payment, but somewhere in your next mortgage term, that's where you should set the bar… That is a reality with the law of averages.
Remember, it was only in 2007, but the five year fixed rate was 5.65%. And this current, beautiful prime interest rate that everyone talks about today, was 6.25%
That goes to show interest rates have risen before, and could again… So don't be below the norm.