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Variable-rate mortgages better deal
Fixed mortgage rates may help you feel secure in your budgeting, but the Bank of Montreal says the more volatile variable rate mortgages will save you money in the long run.
The bank put out a report Friday showing that, over the past 30 years, variable-rate mortgages have been more cost-effective about 82 per cent of the time.That may come as a surprise to some after studies have shown many Canadians prefer a fixed-rate mortgage.
A fixed rate locks the borrower into a set interest rate for a certain period of time.
That gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.
Variable rates change along with interest-rate moves.
BMO said the Bank of Canada's overnight lending rate is at its lowest possible point now, which could mean there are fewer benefits to a variable rate in the foreseeable future.
BMO highlighted two historical periods when fixed rates were considered beneficial - in the late 1970s and late 1980s - and both were just before interest rates started rising again.
The bank added that the current interest environment is similar to both of these periods.
"Short-term rates are at extreme lows and pressure is likely to build for higher rates in the year ahead," said deputy chief economist Doug Porter in the report.
"The question of whether to lock in to a longer-term fixed mortgage rate or stay in a variable rate has become an increasingly complex and important issue."
Canada has been in a long-term declining rate environment since the early 1980s, the bank suggested.
As a result, the spread between five-year fixed mortgages and variable mortgages has been pushed wider in recent years, and is now near an all-time high.
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Where Does Your Money Go? ( part 2 )
Step 2: Fixed expenses
Fixed expenses are recurring expenses. You must pay these amounts each month, no matter your income level or your mood.
Step 3: Variable costs
Variables expenses can vary from month to month as they are not necessarily recurrent. When due, you must pay these amounts, whether you expect to or not.
Estimate the costs as fairly as possible and try not to forget any. Some of these expenses are not payable on a monthly basis (taxes, registration, driver's license, etc...) while others are unpredictable (car repairs, illness, etc...).
Be as accurate as possible, based on your past years’ experience. Also, as it is better to save more than not enough, you'll appreciate having a cash surplus.
For those who really want the best way to assess monthly expenses, keep a financial journal for a few weeks. By registering everyday expenses, you might be surprised! These lattes purchased every morning at $3.45 costs $900 at the end of the year!
These small purchases add up! In addition, you will realize quickly that there are many expenses that you failed to include simply because you did not think of them when making a budget. You'll be surprised to see how fast these small amounts can accumulate, forming large amounts that can affect the balance of your budget.
You’ll have to decide what matters most in your life: a trip or a coffee every morning?
Step 4: The results
You have carefully compiled a list of your income and expenditure and, by completing the table, you now realize what your current situation is. Of course, you’ll make adjustments along the way to reflect your salary increases or add an expense account that you had forgotten.
Your budget completed, you have on hand an important tool to help you spend or save.
Once completed, you should print your budget and check it often during the first few months. Annotate it; this way, you’ll gain experience and make a better budget next month.
Remember, the primary purpose of a budget is to see where your money goes. This tool allows you to make adjustments in your financial behaviour and achieve goals you will set.
Generally, it is suggested to get rid of one’s debts as quickly as possible by first paying off the debt with the higher interest rate. A good trick is to tackle the debt with the smallest balance first and moving on to the next and so on, eliminating debts one by one.
In some cases, it is preferable to consolidate debts. This would achieve multiple objectives, reduce the monthly financial burden, reduce the cost of credit and reduce stress.
Do not hesitate to contact your Mortgage Financing Consultant at any time; he or she will be glad to guide you towards the best solutions.
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Where Does Your Money Go?
Your income is not increasing at the same speed as the cost of living, your grocery cart costs you more and more each week, as are taxes, back to school expenses (books, school supplies and clothing), registration for your car or your motorcycle, insurances, etc..
The list is long and the money flows away from you. If you're not in control of your finances, your debt will rapidly increase and you are likely to find yourself in an uncomfortable situation.
So, what to do, what are the necessary steps to gain control? You've tried to keep a budget, but you find it arduous and complicated. Nevertheless, it is necessary so, to help you, we offer a fairly simple and effective method to record your income and expenses.
To establish a budget, a first decision is required. You must choose the period covered by your budget. It may be a week, a month, a year or another period suitable to your situation.
A classic is to make a monthly budget. Indeed, revenues are easy to calculate for a month, as is spending. The rent or mortgage payment and utility bills, telephone, cable television - among others - are often monthly. For these reasons, we will set a monthly budget you can adapt to suit your needs (see Appendix at the end of this document).
Step 1: Income
Do not make the mistake of inflating your income; you will gain nothing counting an illusory or uncertain income. You must live with reality.
Be honest. Remember that the purpose of a budget is to grasp, at a glance, your financial situation. If you inflate your income and minimize your expenses, your budget will be useless.
Revenues are recorded. The time has now come to calculate your monthly expenses (spending).
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