January 20, 2009 – BMO Bank of Montreal today announced that it is decreasing its CDN$ prime lending rate from 3.50 per cent to 3 per cent, effective January 21, 2009.
So what does that mean for a first time homebuyer?
First of all it is important to understand what different mortgage options are out there to you.
Variable Rate Mortgage
- Interest rate fluctuates with the Bank’s prime lending rate
- Payments generally remain the same
Note: The amortization period (number of years it takes to repay your loan) may vary with fluctuations in the Prime Rate (it may be longer if interest rates have risen since the start of the term, or shorter if interest rates have fallen since the start of the term)
Choose this Mortgage option if:
- You want maximum flexibility
- You might sell your home (doesn't apply to first time homebuyers)
- You hope to prepay more than 20% of your mortgage amount
- You believe rates will drop
Fixed Rate Mortgage
- Interest rate stays constant to the end of the selected term
And to further complicate things there are 3 types of Fixed Rate Mortgages out there:
1) Open Fixed Rate Mortgage
- Prepay as much as you want or completely pay out at any time without charge
Choose this Mortgage option if:
- You want maximum flexibility
- You are thinking of selling your home (doesn't really apply to first time buyers)
- You wish to prepay more than 20% of your mortgage amount
- You believe rates will decline
2) Convertable Fixed Rate Mortgage
- Offers a lower interest rate than the open mortgage of the same term
- Option to change to a closed term of one year or longer without charge
Choose this Mortgage option if:
- You want to keep your options open.
- You want lower rate than open mortgage of same term.
3) Closed Fixed Rate Mortgage
- Make regular payments and perhaps limited prepayments
- Offers a lower interest rate than an open mortgage of the same term
Choose this Mortgage option if:
- You want to budget precisely
- You want piece of mind that your rates aren't going up
- You want lower rate than an open mortgage of same term
All this being said, which option is right for you right now? You need to seriously ask yourself what you want to spend per month and how tighly you want to manage your budget. Then I suggest you sit down with a professional - a mortgage broker. They really do have the ability to cater your mortgage to suit your indiviual needs.
A little food for thought..
As early as a month ago, the variable mortgage rate was 5.5%, it is now a record low of 3.45%. Some of you may be thinking, 'Big deal, that's only 2%', well consider this. The average 2 bedroom apartment in Ottawa is $960/month, if you were to take that same monthly payment and pair it with 'yesterdays' interest rate, that would translate it into a mortgage payment for a $193,000 home. If you take that same monthly payment and use 'todays' interest rate, you would be paying down a $240,000 home - that's like someone giving you $47,000 for FREE towards your new home!! As you can see, there is no better time to buy a house - the interest rates aren't going to get any lower.
Thanks for reading!
