Monday, 2 February 2015

Mortgages, Moving and Money - Oh My!

Last week's announcement that the Bank of Canada's key interest rate dropped was a big one for anyone with any debt or investments tied to that interest rate. Variable-rate mortgage-holders will enjoy lowered rates for repayment on their biggest investment, and anyone with a line of credit with a variable interest rate will see a lowered cost on paying that loan back. Those with money in a traditional savings account, however - already a low income saving strategy - will earn even smaller returns on their investments while the interest rate remains so low.

The temptation is there to take advantage of the lowered rates in some way, to take on more debt while the cost of servicing that debt is so low. Maybe now is the time to finance that kitchen reno, or even to take the leap and buy that bigger house. Why not take on a bigger mortgage when it will hardly cost any more to repay? But watch out - in that direction debt problems lie.

Consider all the costs of moving rather than just the lower carrying costs on your mortgage or the bigger house you might be able to buy for the same monthly payment. Moving is expensive.

There's the penalty you'll likely take for altering, extending or renewing your mortgage before your scheduled renewal date. There's the real estate fee you'll pay to your agent - a seemingly small percentage that adds up to an enormous sum of money when you're talking about a several hundred thousand dollar home. There are the lawyers' fees, the bank fees, the closing costs and movers and time taken off work.

Moving is expensive - even if you've still made money at the end of the day (and let's face it - most of the time real estate is a fairly safe investment) moving is undeniably expensive.

But beyond the expense of a move up to a bigger home with a more expensive price tag is the underlying possibility of those low, low interest rates eventually creeping back up, pushing those payments incrementally higher - and the unmanageable carrying costs eventually forcing homeowners into the terrifying position of taking on more debt just to carry on or even losing that bigger, better, more expensive home.

It's just not worth it.

I'd rather stay in the home we love, finishing it and furnishing it to our hearts' desires while whittling down our mortgage than risk more debt on a bigger home with higher carrying costs.

Lowered interest rates are not an invitation to take on more debt. They are not an offer for a bigger mortgage on shiny new house. If you happen to already have a variable interest rate and can take advantage of the temporary savings these reduced rates will afford, good for you. If you're in a position to renegotiate or it's time to renew, try to take advantage of the new lower interest rate if you can.

But don't try to use this new lowered interest rate to take on more debt, new debt, unnecessary debt or increase your existing debt. If you couldn't afford it before, you can't afford it now.

Originally published as "Mortgages, Moving and Money - Oh My!" on my weekly column at gailvazoxlade.com

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