Is it the right time to buy a house?
If you listen to the news regularly you will hear nothing but doom and gloom from American commentators about the state of the global economy. If you listen to Canadian news reports, some are saying the same as the Americans while others are offering a slightly better and less gloomy outlook than their American counterparts. Who should we believe?
It’s my personal opinion that the recent economic troubles that have been plaguing the world have been fuelled even more by the negative media reports. I am not an economist and no one should take what I have to say with any financial weight but it seems to me that consumer confidence in our economy continues to decrease because all we ever hear in the news is how bad the economy is going. I don’t dispute the fact that our economy is not doing well. However, when people hear that the economy is getting worse, they tend to stop discretionary spending, which in turn adds to an already weakening economy. News of economic troubles almost invariably leads to further economic troubles – it’s a catch 22 situation.
One “upside” of the recent economic problems is the lowering of interest rates to historic levels. On March 5, 2009, the Bank of Canada cut its key interest rate to 0.5% and there is some talk in the financial community that the Bank of Canada might even lower its key interest rate to ZERO (0.0%) percent in order to stimulate the economy. A 0.5% Bank of Canada rate means a 2.5% prime rate for most financial institutions. Such low interest rates would normally induce people to start spending immediately. However, people are still very cautious about entering into a huge financial commitment, such as purchasing a new house, because they are uncertain about the future.
Is it the right time to buy a house? Many of my clients are asking themselves this question. Unfortunately, I cannot answer this question for them. If you were considering a house purchase, my advice would be to see a mortgage specialist or a financial planner. Review your current financial situation. Is your job stable? Do you have a good credit rating? How much of a down payment do you have available? As you attempt to answer these questions, I would also ask you to consider your current living arrangements. Do you currently own your own house or are you living in an apartment? If you own your house, does the purchase of a new house mean increased or decreased monthly payments in light of the low interest rates? If you live in an apartment, have you considered the fact that owning your own house will mean that you will be building equity in the house as opposed to spending money monthly on rent and getting nothing back in return?
The other common question I have been asked recently is, “What happens if I refinance my mortgage?” In light of the very low interest rates, many people who are in fixed term mortgages are wondering if they could save money by refinancing. Unfortunately, there is no quick and easy answer. If you are considering refinancing your mortgage, either with your current financial institution or with a different financial institution, you first need to review your current mortgage arrangements. Do you have an open or closed mortgage? Is it a fixed rate mortgage or a variable rate mortgage? Does your mortgage have a prepayment provision included? What are the penalties for early payment of your mortgage? Before you rush into a new mortgage, first take the time to understand your current mortgage and what your financial consequences will be if you payout that mortgage early. For some financial institutions the penalty to break a mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates. The Financial Post recently ran an article called Breaking Up with Your Mortgage in their March 7, 2009 issue (www.financialpost.com). I highly recommend that you read this article if you are considering refinancing your home. It talks about penalties versus potential savings in a very intelligent and straightforward manner.
The decisions to buy a new house or refinance the mortgage on your current house are very important financial decisions that should not be entered into lightly. The differing news reports on the state of our economy and economic predictions are often more confusing than they are helpful. If you find yourself in this situation, my advice to you is to seek professional advice. Talk to your financial advisor or mortgage specialist. They are the ones who are knowledgeable about your financial situation and about the different mortgage products available in today’s market. Don’t expect to find the answers simply by turning on your television. Take the time to talk to a professional. Remember, it’s your money at stake.
Disclaimer: The content of this article is not intended as legal advice and is for information purposes only. Should you require legal advice on a specific issue relating to the contents of this article, please seek the services of a legal professional. Alona C. Mercado is a lawyer practicing in Winnipeg with the law firm of MONK GOODWIN LLP. She was called to the Manitoba Bar in 1999 and the Ontario Bar in 2003. Her preferred areas of practice include wills and estates, committees, real estate, business and commercial transactions, and immigration law. Alona can be reached at (204) 956-1060 ext. 233 or firstname.lastname@example.org