Choose short term money for long term gains.

short termOnly recently has 5 year fixed rate become a product worth considering when it comes to paying the least amount of interest on your mortgage.   Studies prove that short term mortgage funds are the cheapest way to finance a house.. this includes Variable rate mortgages.

Historically, Variable rate and short term fixed rates have had lower rates than long term rates.   And yet, the BIG SIX BANKS, the Federal govt, and several popular finance experts have preached 5 yr fixed.  ‘You must take 5 year fixed so you know what your rate is.’   That’s a load of nonsense.   It’s true, that over the past 2 years, 5 yr fixed did make more sense given that the spread between Variable and Fixed was less than my target of 1.00%.  (I like to see a 1.00% spread between Variable and 5 yr fixed before recommending Variable).   

And 1 and 2 yr fixed rates were also not meeting that rate spread.   So the Federal govt and the BANKS got their wish and pushed into 5 yr fixed rates…  The smart borrower stayed away from the BIG SIX BANKS when it came to fixed rates given the inflated penalty calculation that the banks use.

But today, we have a new product to consider.  A 1yr fixed can be had for 2.79% and a 2 yr can had for 2.69%.  And these come with the fair penalty calculation.  The 5 yr fixed is 3.39%, and although the spread is not at my desired 1.00%, I am looking at these products as they assure us that our rate will be close to what today’s Variable rate is…  and some believe we could start to see better Variable rate pricing in the next 12 to 24 months.   Even if that doesn’t happen, you will still be saving yourself 0.70% a year for 2 yrs.. and that’s a savings of over $4,000 in 2 years on a $300,000 mortgage.   Not bad.

The negative is that if rates do go way up, then you may regret not taking a 5 yr fixed….

Remember, stats tell us that Canadians change their mortgage every 3 years on average.   These are real stats…  Sometimes it’s by design and other times it’s not… life throws all of us a few curves… the secret to survival is to plan for the worst…  I don’t know about you, but I’m tired of seeing Canadians hit with $10k, $15k, $20k in mortgage penalties.  Don’t be the one that contributes to the BIG SIX BANK’s net profit.

If you believe that we will continue to be in a period of low rates for the next few years, then choosing short term could be a good option…  And even in rates were to increase, are they likely to increase my more than 0.70% in 2 years?  It’s possible… but I’m not convinced….

So today, I’m suggesting we consider a 2 yr fixed rate mortgage.   It may not be for everyone, but it will suit a great number of borrowers.

Your best interest is my only interest.

As always, I welcome your comments, calls and questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

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