Low interest rates spawn prepayment trend

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With interest rates having sat at historically low levels for the last couple of years, some clients’ prepayment plans have taken a backseat to other investment opportunities and, yes, even frivolous spending, say brokers.

“I think with interest rates at record lows, especially on the fixed-rate side, people (who are further along in their amortization) are not rushing to pay their mortgage back,” says James Laird, president of CanWise Financial. “Those who like to invest in other areas are saving their money because they think they can earn more than the 2.5 per cent fixed rate on their mortgage.

“Further, we’re even seeing customers who have a lot of equity in their home refinancing so they can take out money so they can invest.”

Laird says the move is a risky one, but its reward potential is also much higher.

“What we’re talking about is using debt to invest,” he says. “It increases your risk and increases your reward.”

But not every demographic is keen to boost their household risk profiles. Anthony Ambrosio, an agent with CSI Mortgages, says families who have topped off their mortgages to afford their dream homes don’t have access to the disposable income to take advantage of prepayment privileges in the first place.

“We have a lot of families who are borderline and they’ll never take advantage of (prepayments),” he says, admitting only a small percentage of his clients take advantage of prepayments in the first place. “They’re paying the credit card, paying for the cars, the kids’ school… The extra surplus of cash doesn’t exist right now.”

First-time buyers, too, are keener to pay down their premium to become mortgage-free sooner, instead of using that income to invest.

“There are younger couples who want to pay off their mortgage faster… through prepayment privileges,” says Danny Saikaley, an agent with Canadian Mortgage Forces.
Those more established homeowners, though, are more willing to forego prepayment privileges in favour of alternative investments – and even some of those aforementioned frivolous spends.

“Those (more established clients) don’t really take advantage of the prepayment privilege because the mortgage is smaller,” Saikaley says. “They’re just enjoying their lives. That’s what I’ve been seeing.”

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