Comparing numbers

on™” PLANTS GALORE
Park Royal's Only

Garden Centre
Open to serve you until August 31, 1993

EATON‘S Park Royal

(Behind the Market between Super Valu & Eaton’s)

puts declining rate

mortgage in new light

THE LATEST wrinkle in
consumer home financing is
something called the
‘declining rate’’ mortgage.

By Rick Bates, CA
Contributing Writer

Launched in May, the new-style
mortgage comes in two terms,
seven years and five years. For the
seven-year term, the rate starts
out at.9.25%; the five-year begins
at 8.75%.

In each case the rate drops by a
quarter point each year to a final
rate of 7.5%.

On the surface that may appear
to be pretty good. But hold on.
As any chartered accountant will
ask, how does that compare with
going rates for regular mortgages?

Currently the one-year mort-
gage rate stands around 6.5% (or
better), the two-year at 7.75%,
the three-year at 8.25% and the
five-year at 8.5%.

So already some of the shine is
going off the declining rate deal.
But let’s take a closer look.

Suppose you go for the seven-
year declining rate package. That
means on a $100,000 mortgage the
monthly payments start out al
$844,. reducing by about $16 a
month each year for the remainder
of the term, with a final year’s
monthly payment of $746.

Now, if you opted instead for
the standard one-year mortgage at
6.5%, your monthly payments on
the same $100,000 would be only
$670 —. $174 less per month than
the other.

The risk, of course, is that in-
terest rates will be higher when it
comes time to renew. But that
may not be such a big gamble.

To leave you in exactly the same

financial situation as the declining
rate mortgage, interest rates would
have to increase substantially —
and they’d have to average
9.125% a year,

So even if the rate increased
next year to seven or eight per
cent (a major increase indeed),
you'd still be well ahead by going
with the one-year term — if you
don’t mind the risk.

The other thing is that it gives
you a great opportunity to really
tame your mortgage. And that's
the name of the game.

Suppose that you upped your
monthly payments from $670 to
$844, the same as the first year
declining rate payment.

This way you would shave
about $2,100 right off the top of
your mortgage. So when it comes
time to renew, the principal would
be less than $98,000 and not
$100,000. You’d save a lot in in-
terest.

And further suppose that if in-
terest rates stayed at the 6.5%
level while you kept paying $844 a
month, you'd have your entire
morigage paid off in less than 16
years, instead of 25.

The big plus here is that in such
an event your total interest cost
would be $58,790, compared with
$133,118 in the case of the
seven-year declining rate miort-
gage.

So it pays to check the numbers
very carefully.

Rick Bates is assistant professor of
accounting & finance at the Uni-
versity of Guelph.

The information in this article is
of 2 general nature and should not
be considered definitive financial
advice. Individuals should seek
professional advice which takes
into account their personal cir-
cumstances,

ANEW

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