The Bank of Canada recently confirmed what many homeowners have been hoping for – low interest rates are the new normal for Canadians with rates not expected to rise until at least mid 2016.
While low interest rates are clearly good news for borrowers they also create the need for long-term thinking.
In the past, consumers who chose variable rate mortgages often faired better than those who picked long term fixed rate mortgages. Part of this was because variable rate mortgages were considerably cheaper than fixed rate mortgages, and part of it was because rates for the last 30 years tended to trend down rather than up.
Today however, short-term fixed mortgages and variable rate mortgages are almost the same price and there is little chance of rates going lower. Consider for example a 3-year fixed mortgage versus a 5-year variable. A 3-year fixed can be obtained for as little as 2.49%, while a variable rate mortgage typically costs 2.50%. The price is essentially the same, but the 3-year fixed comes with a three year guarantee that the interest rate will not increase. While the security of the fixed rate may not be necessary, if you don’t have to pay more for it you might as well take it.
Now consider that the Bank of Canada has suggested that interest rates will not increase until 2016, which gives Canadians a two year window where interest rates will remain the same. But what happens after 2016? There are two possibilities – rates could remain the same long term or they could increase. If rates do increase we won’t know how fast or by how much until well after it has happened.
What that means for consumers is we have two years of certainty followed by a period of relative uncertainty. If you acquire a 5-year fixed mortgage this year your scheduled renewal date will be 2019, three years into the uncertainty period. If interest rates start to increase between 2016 and 2019 you could find yourself renewing your mortgage at the worst possible time.
Normally, in this type of rate environment we would recommend a variable, but since we know that a 2-year or a 3-year mortgage can provide us a guarantee for the short term and are essentially the same price as a variable, short term fixed mortgages are emerging as the most strategic mortgage option. They allow a consumer a few years of rate certainty with the opportunity to reevaluate before rates go up rather than riding it out until 2019.
For more information on variable versus fixed mortgage strategies give an Accredited Mortgage Professionals (AMP) at Mortgage360 a call – we would be happy to help you make your vacation home dreams a reality.
Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360, and the author of The Mortgaged Millionaire
