Who else wants free coffee everyday for the next five years?
When you talk with your bankers about mortgages, they say that the most important is the reputation of the lender and the customer service you get. Many mortgage specialists may also advise you that it is the service you get and the planning aspect of your mortgage that are most critical.
However, when you talk about mortgages with your friends and colleagues, they enjoy talking about interest rates and how low or how high their rates are. Why is there such a difference between your bankers and friends? Some mortgage experts explained: it is easy for consumers to talk about interest rates since the rate is the only visible thing understandable to consumers!
Who is right? My answer is this: the consumers are right. Consumers have become smarter with all their learning and the easily accessible knowledge on the web. This difference comes from where the parties stand in terms of self-interest!
Higher Interest Rate Steals Your Money
Before I get into the numbers to show why interest rate is the most important factor for mortgages, I want you to answer two questions. First, is it easy to ask for a raise from your boss? Secondly, is there anyone who gives you a free coffee every morning for five years?
Math does not lie. Let us review a few interest rate examples to understand the cost of higher interest rates. The calculations below are for a mortgage of $250,000 with 30 year amortization. You are offered with 3.59%, 3.79%, 3.99% and 4.25% for a five-year mortgage. The following table provides you with the monthly payments, total interest paid in five years and total interest for 30 years.
|
Rate |
Monthly Payment |
Total Interest (5 yrs) |
Total Interest (30 years) |
Daily Interest |
Daily Interest Difference |
5 Year’s Interest Difference |
|
3.59% |
$1,131.48 |
$42,375.32 |
$157,334.13 |
$23.22 |
— |
|
|
3.79% |
$1,159.27 |
$44,788.39 |
$167,336.19 |
$24.54 |
-$1.32 |
-$2,413.07 |
|
3.99% |
$1,187.38 |
$47,205.18 |
$177,457.66 |
$25.87 |
-$2.65 |
-$4,829.86 |
|
4.25% |
$1,224.42 |
$50,352.15 |
$190,790.78 |
$27.59 |
-$4.37 |
-$7,976.83 |
During the five-year term, your loss would be around $8,000 between 4.25% and 3.59%. With a mere 0.20% difference in interest rate, your loss would be $2,413 for five years.
Get Your Free Coffee Everyday
Let’s feel this loss in terms of what we can all relate to. If you get a morning coffee ($1.32) for free for five years, are you going to love it? Would it be a good idea to put this money into your children’s RESP or your own retirement fund? Please also note that the $2,413 is money after taxes and it is worth more than $3,000 before taxes!
You can avoid the loss by getting a lower mortgage rate. You can switch your mortgage to Valueland to earn your daily free coffee for the next five years!
Martin Shao is the President of Valueland Mortgages. Forward your mortgage questions to AskUs@valueland.ca or visit Valueland’s website at http://www.valueland.ca |