As a mortgage broker the worst question to get asked is “what’s the best rate you can get me?” When you shop for rate alone, you are unfortunately missing the bigger picture!
Let’s look at why this makes a difference when purchasing property in Canada and the US.
When you buy in Canada rate might be a good focus for you, because there are so many lenders competing on rate alone and with the high property prices rate is the main focus, because it indicates in many cases whether we can cash flow or not.
However, aside from rate is the type of rate (variable or fixed) and the term you choose.
For instance, In Canada if you are a Rent to Own investor, you want to get a 3-year fixed or 5-year variable not a 5-year fixed. Why? It comes down to penalty. If your tenant buyer is on a 3-year term and does meet requirements to qualify but you took a 5-year fixed term, you will now incur the IRD or Interest Rate Differential, which is the penalty you pay on the fixed. Depending on the lender you had, this can be a few thousand dollars to many thousands of dollars (the banks typically charge more and each lender has their own way of calculating the penalty).
Conversely, if you are a buy & hold investor, you may want the 5-year fixed but again it may be better to get the 5-year variable (assuming you qualify) because with most lenders, you will only incur the 3-months penalty, which means once your property appreciates, you can refinance and pull out equity to either buy another property or do renovations on the existing property.
Now let’s look at the US. As I am now assisting Canadian and even US buyers (referrals from other investors) to purchase residential and commercial properties, it is easier to have the conversation with them. It’s not about rate but rather the exit strategy.
In certain markets, where appreciation is low or non-existent but investors are thinking long term and buying properties for under $100,000 (yes these markets still exist), they are focused on rate, however they should be focused on exit strategy. If shit hits the fan in the US again and your property has not appreciated and you hold a mortgage, how do you sell or refinance that property? The simple answer is you can’t!
If you bought a property and could not finance with conventional or even private lenders but had to use a hard-money lender, what is your exit strategy when you purchase a property in a market that does not appreciate? You can’t – you are stuck!
So my advice if you are buying in Canada and/or the US, look at your exit strategy first and not rate. Ask questions such as:
- Will this market appreciate?
- Will I be able to get conventional financing or only Hard money? If hard money, rate is out of your control as it starts at 12% + 4-6 points in most cases;
- In this market, what is the max LTV I can get for both purchase and/or refinance?
- If I want to sell this property in a few years, will I be able to find a buyer? In some markets, this has proven to be difficult for buyers as they did not do their homework at the beginning;
So in closing, stop asking “what is the best rate I can get?” and start asking “what is my exit strategy?”.