One of the most critical things you can do when you are considering buying a home is to choose the right mortgage strategy. Too many borrowers only think about 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!)



What's the correct mortgage strategy? Well, you probably can't answer that question for yourself. What you can do is consult a mortgage broker who specializes in custom mortgage packages. Why do you need to do this? The main reasons are

-we don't know where interest rates are going.

-economic conditions, both present and future have to be considered.

-A mortgage strategy is a complex, uniquely personalized approach that takes each borrower's situation into account.

All of these factors, 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 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.

Thousands of papers and hundreds of books are out there about the movement of interest rates. But for a basic understanding you need to know the three scenarios that interest rates can take and the two rules that interest rates follow.

Scenario One: Interest rates rise, as they did from 1950 to 1980.

Scenario Two: Interest rates decline, as they did from 1982 to 2003.

Scenario Three: Interest rates remain stable, as they have from 2003 to 2006.

To work within these trends is important, since, if you use the wrong mortgage strategy (for example one designed for falling rates, and then rates go up), you will be paying way too much for your mortgage.

Next, you have to comprehend 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 increased interest rates, since there is a higher demand for money, and a weaker economy will mean lower interest rates, since the demand for money will go down. It is also important to understand the rules of interest rates. 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.)

The exact prediction of interest rates is almost impossible. We have seen interest rates increase over the last thirty years, with the average rate being 9.25%. Today, however, it is at about 5%. Perhaps at this interest rate level, you think it would be wisea good idea to consider a 5 year fixed mortgage. But if you had done that over the prior historic period, it would have been a disaster.

Which strategies do professional mortgage consultants 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.

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 home 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.

The secret is to find the right strategy or mix of strategies for the client. In doing so, a mortgage broker can save a client a lot on the cost of the mortgage.

Your mortgage broker will explain each of these strategies and review if and how they would work in your individual circumstances. He is also able to gauge the economic environment to help you make the right decision. If you want to choose the best mortgage strategy, make it your strategy to meet with a mortgage broker. Such a consultation costs nothing may end up saving you thousands.