Many Canadians Lack Basic Mortgage Knowledge
Making the correct mortgage decisions is crucial. As Canadians face the challenges of increasing home prices but improving mortgage conditions, getting it right could be the difference between spending or saving thousands of dollars over the long term. However, a recent study by RATESDOTCA has found Canadian homeowners are not as savvy with their mortgage decisions as they think they are.
In the second annual RATESDOTCA Financial Literacy Survey many respondents believe they have an above average knowledge of mortgages. Interestingly, the results of the survey show this may not exactly be the case.
Properly understanding mortgages is arguably the most important financial knowledge someone can have. For most people, home ownership will be their biggest investment and largest debt. Whether it’s understanding the dynamics of your mortgage or making the correct decisions now to benefit your retirement, having financial knowledge when borrowing to buy a home is critical.
According to the Survey respondents show there is a gap between what they believe are the best financial decisions and what will really help them.
Fifty-eight percent (58%) of respondents say they are highly likely or somewhat likely to reinvest into their mortgage if they receive a financial windfall such as an inheritance or salary increase. While dealing with the mortgage may seem like a good use of extra money, RATESDOTCA points out that may not be the case.
In an era of historically low interest rates, focusing on paying more off that is necessary on a mortgage could be unwise. Saving extra money for retirement through solutions such as a RRSP or TFSA could increase the windfall in the future. Mortgage payments will remain, and you can handle those as they normally come up, allowing homeowners to save current dollars with the goal of appreciating their current dollars.
When it comes to the most important factor when choosing a mortgage, 44% of respondents believe interest rates to be the most important consideration. Sure, rates are particularly important when it comes to understanding the overall cost of mortgage borrowing, but it is not the be all and end all. Penalties, term costs, and fees also play a role.
In fact, understanding penalties and fees associated with mortgages can help to save thousands of dollars depending on the lender you choose. In the survey, just 3% of respondents think fees and penalties are the most important mortgage factors.
Looking at mortgage default insurance, just 34% of participants know what the minimum down payment is to avoid paying insurance. A 20% down payment is required to avoid paying default insurance, which means 66% of Canadians could be saving not enough or too much towards their down payment.