More and more individuals are locking into fixed rates. The first quarter of this year has delivered some unprecidented historically low mortgage rates which in some cases could not be ignored by many. I fielded a ton of inquiries on whether it would be worthwhile to make the switch to a lower rate or just ride out their current term until it was over. In some cases, the answer was clear and concise.
In addition to the 4 and 5 year fixed rates that were offered for 2.99%, some lenders have been dangling the carrot with a 10 year fixed rate of 3.89%. This begs the question, "Should I lock in to this rate so that I have a safety net for the next few years?"
It's not as easy as a yes or no answer. According to Canadian Mortgage Trends, nine out of ten times the 'safety' of a 10 year term has cost you more interest than two consecutive 5 year terms. (Fixed Mortgages: 10 year vs. 5 year). So, that still leaves 10% of the time you may come out ahead. The 10 year term has not traditionally been offered at such a low rate in the past so historical performance may be misleading in today's marketplace.
As mentioned in previous blog posts, the interest rate is just one consideration when shopping for a mortgage. For example, the average mortgage term in Canada is estimated between 3.5 and 3.7 years. If you were to keep up with this trend and discharge your 10 year term early, as in the initial 5 years, you would be responsible for paying the IRD penalty on the 10 year term. These penalties could be massive, upwards of tens of thousands of dollars. There are many unknowns that could happen in 5 years such as a job loss, divorce, sale of a home where you may not be porting your existing mortgage etc.
On the contrary if you were to make changes or discharge your mortgage after 5 years of your 10 year term, thanks to the Interest Act you would only need to pay a penalty of 3 months interest; the much favourable option for sure. We are not always living in the past so I'll make the assumption that there will be an economic recovery which could potentially push inflation which will eventually increase interest rates.
The 10 year term is a great option for some such as the self-employed. Mortgage rules are more stringent on the self-employed and it's anyone's best guess if mortgage rules will be tightening in the future. Qualifying for a mortgage could make it that much more difficult so locking into long term security may have it's benefits.
It's difficult to hedge against the unforeseeable future, I think everyones' scenarios are different and you should consult a professional for specific information relating to your situation. It may just make perfect sense.
As always, I encourage you to contact me if you have any questions with your current mortgage or are looking for one. Please find me on facebook at Jason Nesseth | Mortgage Specialist | British Columbia and on twitter @jasonmortgages.
"Working with you for the life of your mortgage"
Jason Nesseth with TMG The Mortgage Group Canada Inc. If you have any questions or comments about this blog, please feel free to call Jason at 604.375.7375, email jason.n@mortgagegroup.com or visit his website at jasonnesseth.com