What Mortgage Product is best for my Real Estate Investment?

You’ve done your due-diligence in identifying a great investment property. All the numbers seem to work and the finish line is up ahead. But wait…an unexpected obstacle appears out of nowhere and you are not sure if you should take a safer path around it or leap over it and take your chances.

Do I pay a premium and mitigate my risks with a fixed rate or take the lower variable rate and stay attuned to any market changes? It all depends on your risk profile and your strategy. Either option has its pros and cons:

Fixed Rate Advantages:

1. You know what your payments are and can easily budget.

2. These mortgages are typically easy to understand and are well defined

3. You don’t need to follow the Bank of Canada, Mark Carney or do any macro economic analysis to determine if and when you should lock in.

4. Sometimes rates can sky rocket and force investors to foreclose the property.

5. If your credit is good and your debt/service ratios are solid, you can get a pretty good deal on a fixed rate.

Variable Rate Advantages:

1. If rates go down, you are way ahead of the game in savings. Even if they stay flat, you still win out considerably.

2. You typically get more options with a variable rate mortgage.

3. If your credit is not great, you might not qualify for a reasonable fixed rate.

4. Your penalty might be lower with a variable if you have to break the mortgage as banks typically charge 3 months interest instead of interest rate differential.

We live in a time with historic low interest rates. Our buying power has increased substantially as a result. Investors can borrow at rock bottom rates, but how long will it last?

What do we know about mortgages rates and where they are heading? First we must understand that there is a distinction between how the rates are affected. The variable rate is contingent on the Bank of Canada which recently stated that it will be keeping rates down throughout 2012. The reason for this is that Mark Carney needs to follow the US’s lead. America in not going to be changing the rates until 2013 in order to stimulate their battered economy.

The fixed rate on the other hand works off of the bond market. The news in Europe and the US impact the bond market and as result impact the fixed rates. If you think there will be a quick recovery and quick rescue for Italy and Greece then the fixed rates might start to go up and you might want to lock in. However, if you feel you have a long way to go, then you would probably want to hold off.

What about the potential threat of a recession? How does this impact your strategy? Canada’s finance minister says we are fine, but where do you stand?

Any good investment strategy requires a strong team of experts behind you. Make sure your accountant, property manager, lawyer, real estate agent and mortgage broker understand your long-term strategy with each investment property. A good mortgage broker will advise you on what is best for you.

Note: Mekler Property Management offers property management services in the Greater Toronto Area. For more information please visit us at www.Mekler.ca – We help you be a landlord without being the landlord!

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