The 2 most popular mortgage terms are 5 year fixed and 5 year variable. Only a short year ago 60% of borrowers were choosing the variable option, but today’s landscape favours fixed mortgage rates. Fixed mortgage rates and variable mortgage rates fluctuate based on the lenders cost of funds. What many don’t realize is that the cost of funds for variable mortgage rates and fixed mortgage rates can move in opposite directions. This is exactly what’s happened over the past year causing fixed rates to fall while variable mortgage rates have risen. For borrowers negotiating a mortgage, a fixed mortgage rate is the way to go. Here are the top 3 reasons why.
1) Pay Less Interest
Today’s 5 year fixed and variable rate mortgages are equivalent at about 3%. A year ago when the majority of borrowers were choosing the variable rate option, they were a full percent cheaper than the fixed mortgage rate option. With rates at all-time lows, there’s nowhere to go but up. Borrowers taking a variable rate mortgage will surely face higher rates in the years ahead.
2) Ensure your Financial Future
Jim Flaherty and the finance department are worried about the debt levels in Canada for a very valid reason. Although Canadians are currently able to service our high levels of debt, any economic shock could have a devastating impact, especially to those of us up to our eyeballs in debt. One of these shocks could be a dramatic increase in interest rates and therefore monthly payments. By locking in your mortgage rate for the next 5 years you immunize yourself from any interest rate changes for at least the next 5 years.
3) Create an Asset
In the likely event that rates rise 1% to 2% over the next 3 years, anyone holding on to a mortgage at 3% has an asset they can leverage. Of course in order for this to happen, you need to ensure your mortgage is assumable and portable. If you decide to sell, you could then port over that cheap mortgage with no penalty and keep a below market interest rate. Alternatively, you could offer the buyer the opportunity to take over your below rate mortgage. This potentially could get you a higher sale price or move your sale along a lot quicker if it sets your house apart from the competition.
Although fixed mortgage rates are now the better option for most people, be sure to consult an accredited mortgage professional to make sure you get the best mortgage product to meet your individual needs.