There is always a great deal of speculation about the future of mortgage interest rates. Where are they headed? How soon will rates start to rise? How can I protect myself from interest rate hikes that may compromise my ability to continue to own my home?
For the past 20 years mortgage rates have been falling and as a consequence, it has always been more advantageous to go with a variable rate mortgage. However, with rates at historic lows and expected to rise in the future the ground rules have changed.Mortgage debates are no longer focusing on whether to consider a fixed or variable mortgage but how long to lock in for. Five year rates are offered for as low as 2.79% versus the 10 year which are offered as low as 3.79%.
Unless you are planning on being mortgage free within the next 10 years it’s pretty much a no-brainer. With rates set to head substantially higher within the next 5 years, locking in to the 10 year rate may be a prudent thing to do as long as the mortgage is – and this is critical - both transferable and assumable.
Transferrable means if you move to another property you can transfer that same 10 year mortgage to the new property. Assumable means the mortgage can be assumed by the new buyer of your house if you no longer need the mortgage. Therefore if rates are higher at the time of sale of your house, you can offer it to the buyer to assume which would give you a huge marketing advantage over other houses on the market.
The 10 year rate buys peace of mind as you know your fixed cost for 10 years which is a very long time. Think back to where you were in life – family, financial, economic – and consider how much things have changed during the past ten years.
One more important benefit is that if you need to discharge your mortgage after 5 years, under Canadian law any mortgage with a term longer than 5 years, financial institutions can only charge you 3 months interest to break your mortgage. This penalty could be much lower than even the interest rate differential on shorter term mortgages which could end up costing many thousands of dollars more.
In addition, if you are coming off a higher rate mortgage and you are comfortable paying that amount, consider continuing to pay at that same rate even after renewal at today’s lower rates. This will have significant impact on the outstanding principle over the 10 year term of the new mortgage. In addition, consider switching your payments to weekly or bi-weekly instead of monthly. It won’t cost any more than you are already paying but there will be a major impact on the amount of mortgage outstanding at the end of the term.