How savvy do you think you are when it comes to making the right mortgage choices?

About half of Canadians feel their mortgage knowledge is above average, but based on the second annual RATESDOTCA Financial Literacy Survey, their responses tell a different story.

Getting it right has real implications, given a mortgage is likely the biggest debt you’ll ever have. Bad mortgage decisions routinely leave homeowners with smaller nest eggs in retirement. So let’s see how you stack up. Pit your knowledge against fellow Canadians in RATESDOTCA’s five-question Mortgage Literacy quiz.

Question #1

Takeaway

Results of the second annual RATESDOTCA Financial Literacy Survey:


Very likely – 35% of respondents chose this
Somewhat likely – 23%
Somewhat unlikely – 12%
Very unlikely – 30%

More than half (58%) would likely apply newfound money to their mortgage. And for most, that’s a financial mistake.

Spare cash should be allocated to its best use given your goals and risk tolerance. That may not be a mortgage payment — particularly at historically low interest rates. Instead, you may be able to grow a larger retirement nest egg by depositing those funds in an RRSP or TFSA, for example, thereby earning a higher after-tax rate of return.

Three things are worth remembering:

  1. Mortgages don’t appreciate. Assets do.
  2. Investors don’t have to be heroes. Dollar-cost averaging into broad market indexes funds earn returns that substantially exceed mortgage interest rates over time. (More on that)
  3. Other things equal, a dollar today is worth less over time.

That’s why, if your time horizon is long enough, you’re often better off paying more of your mortgage with future dollars and investing current dollars in assets that appreciate faster (after taxes) than the rate of inflation.

On the other hand, if your time horizon is short and/or your risk tolerance is low, lump-sum mortgage prepayments are still one of the best risk–free and tax–free returns you can get.

(Note: The Financial Consumer Agency of Canada recommends getting advice from a qualified financial advisor before embarking on any investing plan. This site does not provide investment advice.)


Question #2

Takeaway

Results of the second annual RATESDOTCA Financial Literacy Survey:


Interest rate – 44% of all respondents choose this
Total borrowing cost over the term – 19%
Term – 16%
Fees – 2%
Penalties – 1%
Contract restrictions (e.g., inability to refinance early) – 4%
Don't know – 15%

Time and again, people overlook the most important goal when getting a mortgage: reducing the overall cost of borrowing. Interest expense—which is determined largely, but not solely, by the rate—is usually the main driver of total costs. But fees, penalties and opportunity cost matter too. Fees and penalties can shave tens of thousands of dollars off your retirement savings if you pick the wrong lender. Opportunity cost refers to what you give up by choosing one lender over another. For example, if you get sucked into a low upfront rate, but the lender charges big penalties on an early termination or quotes you bad rates on refinance, that’s an opportunity cost (because you could have chosen a lender with more favourable policies). Combined, these non-interest expenses can cost you far more compared to what a lower rate might save.


Question #3

Takeaway

Results of the second annual RATESDOTCA Financial Literacy Survey:


5% – 17% of all respondents chose this
10% – 19%
20% – 34%
25% or more – 11%
Don't know – 19%

Overall, only one third (34%) of all respondents correctly chose “20%.” That’s worse than last year’s 39% result. This suggests some people may be saving too little or saving too much for their down payment. By saving too little, some with less than 20% down end up surprised when their payment and mortgage balance are higher than expected—due to the mandatory default-insurance premium being tacked onto their mortgage. By saving too much, some risk delaying homebuying, only to see prices run away from them.


Question #4

Takeaway

Results of the second annual RATESDOTCA Financial Literacy Survey:


Very confident – 13% chose this
Somewhat confident – 25%
Somewhat not confident – 29%
Not confident – 33%

Almost 4 out of 10 people expressed confidence in their ability to predict interest rates five years from now. Meanwhile, the world’s very best interest rate analysts (who publish public forecasts) are right only half the time when it comes to rate direction. In other words, a coin flip would be almost as accurate as your typical rate expert. Why, then, do so many of us overrate our ability to see the future? How many borrowers will pick the wrong term because of what their gut tells them about rates in 2025? Research has shown that shorter and/or variable terms save you more over the long run. Fixed rates outperform only a minority of the time, generally when rates are at the bottom of an economic cycle and when variable rates offer no substantial discount to fixed rates.


Question #5

Takeaway

Results of the second annual RATESDOTCA Financial Literacy Survey:


A fixed-rate mortgage – 30% chose this

A variable-rate mortgage – 42% chose this

Don't know – 27%

Only 4 in 10 chose the right answer: variable rates. That means many are locking in for the wrong reason.

When rates are near rock-bottom, like they are today, that’s not a huge problem.*

When rates are one to two percentage points above their 5-year average, it’s a big problem. That’s when variable rates really outperform fixed rates.

* There’s one exception to this statement. Choosing a fixed-rate mortgage may seem wise if we’re at the bottom of an economic cycle, or if fixed rates and variable rates are very close. But if you break a fixed rate mortgage early, you could face a painful interest rate differential (IRD) penalty. That is, if you choose a lender with a punitive penalty formula.

IRDs do not apply to variable-rate mortgages.


A Few Takeaways...

If your mortgage knowledge feels a bit lacking, fear not. The recipe for smarter mortgage decisions is simple: more reading and good advice.

For the former, here are two handy resources to keep on hand:

As for advice, the safest bet is finding a reputable, experienced mortgage broker to point you in the right direction. And be sure to check their Google reviews to see what others say about them.

But don’t stop there; take your broker’s advice and verify it with a second source, like another broker or lender. Everyone’s advice has biases, and the more objective your sources, the more you’ll save.

About the survey

The second annual RATESDOTCA Financial Literacy survey was conducted by Forum Research between September 24-Oct 1st, 2020 and polled 1,179 respondents across Canada with a margin of error of +_2.85%. The sample’s age ranged from 18 to 65+ years old. Survey questions were presented via telephone and respondents provided answers through the touchpad of their mobile device or home phone.

Rob McLister

Rob McLister has been informing mortgage consumers and professionals since 2007. In that time, he’s written more than 2,500 mortgage stories for publications ranging from the Globe and Mail — where he presently serves as mortgage columnist — to the National Post, Maclean’s, Canadian Mortgage Trends and RateSpy.com. Regularly quoted throughout the media, Rob is a committed advocate of greater transparency in the mortgage industry. He’s also been a vocal consumer advocate for more sensible mortgage regulation. In 2011, he launched two mortgage fintechs: mortgage comparison website RateSpy.com and digital mortgage broker intelliMortgage Inc. The former is the go-to source of Canadian mortgage news and the only site comparing all publicly advertised prime mortgage rates. The latter is Canada's leading online mortgage provider for self-directed borrowers. Both companies were acquired in 2019 by Kanetix Ltd.

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