When setting up a new mortgage, there are numerous choices to be made. Choosing a fixed or variable rate, the length of the term, the duration of the amortization period
Prior to the changes in mortgage regulations that went into effect on November 30, 2016, short-term mortgage rates were often lower than those of five-year choices. The rate decreases with shorter terms. Since then, there hasn’t been much interest in shorter-term mortgages due to the changing times.
Today, shorter-term mortgages are still frequently more expensive, but they are currently making a very significant comeback.
Contrary to popular assumption, the rate of your mortgage is not its most crucial part.
It’s not even the savings over the term.
Yes, these are all significant, but the most significant factor is the amount of money you will save over the course of your mortgage.
With the appropriate approach, you can maximize your overall savings, and occasionally picking a product with a higher rate but a shorter commitment can result in further savings.
Today, someone choosing a 5-year fixed mortgage rate would be securing their rate at its highest level in 14 years. It’s not necessarily a bad decision because of that. What is good for one individual cannot be right for the next, so it really boils down to what makes you feel the most comfortable.
A five-year variable rate or a shorter-term fixed rate are the choices (variable rate mortgages are seldom offered in terms less than 5 years).
But if you’re trying to find a middle ground, a shorter-term fixed rate is a good choice.
Before coming to a conclusion, let’s first look at what is being forecasted moving forward.
Inflation will eventually reach the Bank of Canada’s target level of 2.00%, and supply will finally increase again.
By then, our economy will have suffered so severe harm that the Bank of Canada will need to make it a top priority. By cutting their pricing, they will need to increase demand. The more aggressively they must cut rates, the worse the economy will be.
Bond yields can be anticipated to decrease when the Bank of Canada begins to lower its rate or even when there is just a suggestion that a rate cut is imminent. Fixed rates will be under pressure to decline as a result, which they will do.
This is why, even if the rate is greater than the 5 year option, a shorter term fixed rate mortgage might be a wonderful option. A 5 year fixed product that you chose today would not expire until late 2027. Who knows where the rates will be at that point.
Today, the end of 2024 would be the renewal date for a 2-year fixed rate… which, if the rate cuts materialize as expected, could be the ideal time to benefit from them.
At the moment, the lowest 2 year fixed rate is 4.84%*, and the lowest 5 year fixed rate is 4.64%*. By the end of 2 years, the difference between the two options on a $500,000 mortgage comes to about $2,009.
Let’s assume that the 5 year fixed rate will be 2.99% at the end of the 2-year period. The remaining three years at the higher rate would be available if you choose the five-year option at 4.64%. However, if you went with the 2 year option, you would save $23,289 over the remaining 3 years. At the end of five years, you are ahead by roughly $21,000 after deducting the extra $2,009 you paid for initial the 2 year term.
Of course, I’m using this hypothetical scenario as an illustration. Nobody can predict where interest rates will go in 3 years, but given the present economic forecasts, it may very well come to pass.
Future developments are still fraught with uncertainty; therefore, a shorter-term fixed rate can be a terrific alternative to more risky variable rate options.
Rates will eventually drop. The only question is when. It all depends on how swiftly the Bank of Canada can control inflation. Within the next two years, rates should be lower if the present predictions come true. Everything is possible, and only time will tell. You can visit Incredible mortgage for mortgage solutions.