Avoid the 5-Year Fixed Mortgage Trap
Number 3 on our list of things on which Canadians waste the most money is 5-year fixed mortgages.
They are marketed as being safe and a good protection against a sharp rise in interest rates. The reality, though, is that they are nearly always a huge waste money, they limit your flexibility and result in losing your negotiating power for 5 long years.
That is why we call it the “5-Year Fixed Mortgage Trap”. Read more…
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Hi Marty,
To figure out the best mortgage term, you need to think through what you think your average rate will be over the next few years with each scenario.
It is more complex, because current rates include market expecations for interest rates. For example, 1-year rates are higher when the market anticipates rates will rise, and lower when it anticpates rates will fall.
To compare 1-year, 2-year and 3-year, you should think through the next 3 years: today’s 3-year OR today’s 2-year plus a year at the best rate 2 years from now OR today’s 1-year plus the best rates for 2 years after that.
Today, we are recommending either 2-year or 3-year mortgages, depending on the specific quotes for each client.
Ed
Hi Ed – with the impending “doom” being published in regards to the vast number of people who are facing a mortgage renewal in the next year or two, would one year rates still be your suggestion (even though they are higher today than five year rates).
Thanks!
Any updates in 2021 with crazy low rates?
Hi Fabio,
Five 1-year mortgages has saved money 100% of the time over one 5-year mortgage since 1950. There have been some quirky times, especially around interest rate direction changes that looked like they would not work in history, but ended up working.
That does not mean is necessarily will work 100% of the time in the future.
Mortgage rates by term are pretty flat today, with 5-year mortgage rates being only slightly higher than 1-year or 2-year rates.There is a lot of talk about prime going up, but how much will mortgage rates actually rise?
The flat mortgage rates result from the bond market, which means it is the expectation of all bond market investors. Many of them are quite sophisticated and large institutions, with economists predicting rates. That is why mortgage rates normally are a good predictor of where interest rates are going.
In 2017, some people locked-in 5-year mortgage rates below 3%. They might be the first ever to save money with a 5-year fixed. We’ll see.
For 2018, it is more incertain. I tend to believe the long-term history, which is saying right now that even if prime goes up a couple times, mortgage rates will hardly rise.
I tend to prefer short-term mortgages, unless I was quite sure the 5-year would save a noticeable amount of money. I find it very useful to have your mortgage come due regularly, since there are a lot of creative uses of it. It is the cheapest financing, to it is often best to pay all your debts into your mortgage whenever it is due. It can be used for car purchases, major expenses and even RRSP contributions quite effectively.
For today, I am still recommending shorter terms. 2-year or 1-year, whichever is lower. I do recognize that it is possible that the short terms could cost as much or more than a 5-year today.
Hope that’s helpful, Fabio.
Ed
Is this still accurate even with the relative spike of interest rates in the beg. of 2018?