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Mortgage

I did a lot of shopping around for mortgages, most of my research was often reading what other people used for their SM mortgages and why they went with that lender.  I ended up going with FirstLine Matrix (FLM) series, which you may find that some people talk down on.  The main drawback on the FLM is that there is no one year fixed rate (which has historically been a good term to go with).  FLM also did not offer a variable rate in the past, however, this is now corrected with their new ARM (adjustable rate mortgage).  There are some details that I will go over (good and bad) that should be taken into consideration when considering this mortgage for a SM.

• ARM is good, historically, variable rate mortgages almost always out perform the 5 year term mortgage.  Plus if it looks like rates are going up you can (almost) always lock in at the current rate.  The same applies for the FLM, although there are some details that aren’t clear at first.  The first is that your variable rate no longer gives you prime minus X%.  This may show up again in a few years, but certainly not any time soon.  My rate is prime + 0.8%, which is pretty much the best any banks are offering for a variable rate these days. The second is that the ARM has a term of 5 years, which can be a little confusing.  What this means is that you will be prime + X% for 5 years (until your term is up, and you have to renegotiate).  The confusion arrives when you convert to a fixed rate from an ARM, you must choose any term greater than or equal to 3 years (or at least this is how I was explained it worked).  That means that when (if) you decide to convert to a fixed rate, the smallest rate you can choose is 3 years (not a good feature at all).
• Portability is good.  Many banks do not offer this feature at all, and this was such a huge deal breaker for me.  With FLM you can sell your house and buy a new house (i.e. move) without having to close out your SM investment account.  This can save a lot of hassle.  Instead, you just renegotiate a new mortgage and the difference is applied to your current mortgage.
• Prepayment is good.  You want to find a lender that will allow you to comfortably put down extra money into your mortgage when you have it available.  While FLM does not allow you to pay off your entire mortgage without penalty, they do have some very relaxed conditions on prepayments.  Basically, you can prepay up to 15% on each regular payment, summing to no more than 20% every year.  Translation is that prepayments can come any time you have money kicking around.  Even though I plan to try and max out the RRSP before i prepay the mortgage, it is still nice to know that the option is there (if I for some reason come into some money).
• Terms are bad.  Historically, shorter terms fair the best, and my ARM term is 5 years with the option to convert to fixed on a 3+ year term.  I also have the option of renegotiating a 2 year fixed term at the end of my current term.  The bad part is that there is no 1 year fixed term.  On the plus side of things, interest rates are likely going to get lower than they have ever been (i.e. even lower than now), so locking in at a good rate for a longer term is actually beneficial at this point.  Because of this, I will be monitoring FirstLine’s 5 and 10 year fixed rates for the next year or two, as locking in a good rate for a long time will be VERY helpful in the financial department.

My timing to start a SM isn’t the most ideal, but there are some aspects that work to my advantage.  Because I am a new home owner and have no real previous equity, coming up with the 20% down payment was a challenge.  What this means for the SM is that I will begin with an empty LOC portion.  What this translates into is that my mortgage’s tax deductibility will be very ineffective for the first few years (since I won’t have any equity to borrow against).  However, with situation with the markets these days, I end up with a little bit of a buffer zone of time to get things as automated as possible.  I will have to wait until there is sufficient equity in my home before starting to invest (no point buying single shares right?), so this lets me watch the market carefully so that I can begin investing when the time is right.

As you can probably tell, timing is everything, and my goal throughout this entire process has been to be prepared ahead of time so that I can take advantage of good timing.  Of course, with all my equity tied up in the house right now, I am left relatively unprepared for the new few months.  But if my research has taught me anything so far, it’s that the recession will likely last throughout 2009 (and in my opinion, Edmonton to remain relatively stagnant through 2009).  If my prediction (and research) is correct, this gives me ample time to prepare for 2010, the year I begin my journey to financial freedom.

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