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CategoryMortgage Tips

Taking a look at a 1 year and 3 year fixed rates

I’ve had some inquiries about taking a 1 year and 3 year fixed rate…and for good reason.   A 1 year fixed rate can be had for about 2.50% and a 3 year fixed rate is 2.90%.   This does make going with a shorter fixed term an attractive option if Bank Prime rate continues to increase.

Best Variable rate is around Prime less 0.65% or 0.70% for qualified applicants with some conditions….  that puts the Variable rate at 2.30% or 2.35%…

I like Variable rate mortgages for many reasons but these shorter, fixed terms can be a good alternative.. Make sure you understand all the terms and conditions… speak with a qualified Mortgage Broker.

When should I lock in my Variable rate mortgage?

A thought on the minds of many, with all the talk of ‘Historical low fixed mortgage rates’ and ‘rising Variable rates’.   “When should I lock in my Variable rate mortgage?”

Here’s a quick suggestion and rule that I follow… We only want to lock in our Variable rate mortgage when we think Variable rates will go way up and for an extended period of time…

But we must also look at what we can lock into… if you are in a 2.10% Variable rate mortgage, would you lock into a 3.89% fixed mortgage rate?   I’m not sure I would…. I think it will take a few years before my Variable rate mortgage approaches today’s Fixed rate…..  why pay more today when you don’t have to?

For me, I can’t see Variable rate mortgages underperforming Fixed Rates over the 12 to 17 years that it will take us to pay our mortgage off.  Having said that, we are always evaluating the Market Trends and will adjust our strategies when needed.  A mortgage is a huge debt and deserves a solid strategy to retire this debt with the lowest cost.

Ultimately, it will come down to risk tolerance, your personal budget and what you believe will be the better strategy.  Consult your Mortgage Broker to better understand the differences.

By the way, you might be interested in knowing that certain Banks and Trust companies have recently started to pay us more to offer fixed rate mortgages over Variable rate Mortgages…Good Mortgage Brokers don’t let the compensation dictate which product they recommend.  They recommend what they believe is right for the client.

3 year fixed mortgage rates under 3.00%

Fixed mortgage rates are sitting at around 3.89% for a 5 year closed and 2.90% for a 3 year closed.  These are definitely attractive rates and are at or near historical lows…

Why?  The Bond market has dropped significantly over the past 3 months…. this has come as a surprise to many but not all…  The economic recovery isn’t as certain as we once thought… with mixed data coming out about our economy, this uncertainty will cause interest rates to stay low…

Once trend that has caught our eye is that lenders are now offering Mortgage Brokers a higher commission to sell a 3 year and a 5 year fixed rate product… and although that may attract more busy from some, I’m still recommending the Variable Rate mortgage, even though we get paid less.. it’s always about doing what’s in our client’s best interest.

Variable rate has been a proven winner over the past 25 years… I don’t think our economy is as strong as some would think….There has been improvement but we have a long way to go before we can say we are out… Hence the lower fixed mortgage rates… Variable rates will increase but it will be a slow, steady climb… with current Variable rates at 2.10%, Variable has a long way to go before it is not cost-effective.

Do bi-weekly payments save you money?

Back in the mid 90’s, there was a huge marketing blitz by the Big Banks that promoted making bi-weekly payments instead of the traditional monthly payments.   The sales pitch was that you could save huge amounts of money and pay your mortgage off much faster….save 4 or 5 years off your amortization…. Sound familiar?   Well, BI-WEEKLY PAYMENTS DON’T REALLY SAVE AS MUCH AS YOU THINK!

And I’ll prove it…. here’s the straight facts!

Let’s use a $200,000 mortgage with a 25 year amortization, a 4.00% interest rate and a 5 year term.

MONTHLY PAYMENTS $1,052.04.  MORTGAGE BALANCE AT END OF 5 YEARS $174,107.86.

Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term.

BI-WEEKLY PAYMENTS $485.55.  MORTGAGE BALANCE AT END OF 5 YEARS $173,885.20

So you end up reducing your balance by only $222.66 over a 5 year period... Not much of a benefit…you really aren’t paying your mortgage off sooner.

You may have seen options by your Lender or Bank to pay an ACCELERATED PAYMENT.   This simply means you increase the amount you pay every month…  The normal acceleration formula is to make one more month’s worth of payments every year but spread it out over the 12 months… I’ll show you.

LET’S USE THE SAME MORTGAGE OF $200,000, 25 year amortization, 4.00% interest rate and a 5 year term.

ACCELERATED MONTHLY PAYMENT $1,139.71.  MORTGAGE BALANCE AT END OF 5 YEARS $168,300.27.

You end up with a balance that is $5,807.59 lower at the end of 5 years…but don’t forget, you paid and extra month’s worth of payments every year during those 5 years, totaling $5,260.20.  So the net benefit is really $547.39….

Now let’s look at ACCELERATED BI-WEEKLY PAYMENTS of $526.02….the  MORTGAGE BALANCE AT END OF 5 YEARS IS $168,121.95.

The net benefit is a little better… $725.71…

BOTTOM LINE…. increase your payments and you’ll pay your mortgage off sooner…go with a bi-weekly ACCELERATED payment… it is a better choice.. bi-weekly or weekly payments are not a mysterious formula for paying your mortgage off sooner… It’s the INCREASED PAYMENT that helps you pay it off sooner…… After all, the best mortgage is no mortgage.

Didn’t I say to stay away from these Hybrid Mortgages?

Is it just me or are the Banks pushing these Hybrid Mortgages more these days…?  RBC recently reported that 40% of Consumers buying a home in the next 2 years would consider a Hybrid Mortgage…

Wow!  That’s much higher than any figure I’ve seen…  And it doesn’t reflect the current level of Consumers that currently have a Hybrid mortgage. (current figures are at 6% according the Canadian Association of Accredited Mortgage Professionals).

Globe and Mail’s, Chaya Cooperberg, took a closer look at this product…..Oh, and by the way, a Hybrid mortgage simply splits your mortgage ….. part fixed rate and part variable rate.  The theory is that you can benefit from today’s lower Variable rate but also secure a fixed rate to protect yourself from future rate increases….  Sounds great but these products are flawed and DO NOT work in the Consumer’s favor.

Here’s what you need to know:

-studies point to Variable rate mortgages as having the lowest rate of interest over the life of your mortgage.. they just save you money….(your rate fluctuates with Bank Prime…up and down)

-fixed rate mortgages buy you the security of knowing what your rate and payment will be…but the key word here is BUY. Your paying for this insurance with a higher average rate over the life of your mortgage…  (plenty of studies out there to show this).

-combining these 2 products in one mortgage will limit your options… there is a portability feature but it’s not straight forward and we’ve received different explanations on how this actually works….. these mortgages are not transferable to other financial institutions….

-many borrowers that are currently in these products have staggered maturity dates meaning they can never get out without paying some sort of penalty…….

A better alternative to getting part fixed and part floating, is to go with a Secured Line of Credit.. the Floating portion is Open to repayment without penalty…   Keep in mind these products are not portable to a new home and they are not transferable…At least you won’t get stuck with a penalty…

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