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Low Mortgage Rates – Benefits and Pitfalls

Jan. 22, 2012

In the news recently there have been several stories about the historically low interest rates being offered by the major banks. With mortgage rates at an all time low, many people are able to afford more expensive homes than woulld otherwise be possible.

Recently the BMO announced a short term special on a 5 year term mortgage of 2.99%. The other major banks are following and offering similar rates. There are certain contitions that apply with these offers, and it would be wise to have your mortgage professional take a close look at how these conditions may effect your situation.

As an example of the impact these rates can make in your putchase, I’ve figured out the monthly payment rates for two equal mortgages of $200,000.

  • The monthly payment at 2.99% is roughly $950 per month.
  • The monthly payment at 6% is roughly $1280 per month.
A fairly significant difference in monthly payment of $330.

This isn’t the end of the story though. Where the big difference is seen is the amount of principal remaining at the end of the 5 year term.

  • With the 2.99% mortgage there will $171,000 remaining at the end of the 5 year term.
  • With the 6% mortgage there will be $180,000 remaining at the end of the 5 year term.
This is a significant difference considering the $330 monthly increase in payment for the 6% mortgage.

What people need to consider when they sign up for a low interest mortgage, is that rates will inevitably rise and those easy to manage, affordable payments may increase significantly at the renewal date. Look closely at your finances and it’s often a good idea to have your mortgage professional help figure out the payment amount you could be facing in five years with higher rates.

The low interest rates offer a great buying opportunity for people who might otherwise not be able to afford their dream home but they can also cause problems if you don’t plan for changes in your payment schedule down the road.