Your Mortgage renewal is likely looming. And we know the rock-bottom pandemic era interest rates are behind us.
Here are some Mortgage ideas to consider …
Below is a breakdown of several directions you could take your Mortgage at renewal:
1) 3-year fixed term.
2) 5-year fixed term.
3) Variable rate Mortgage.
Payments below are based on these numbers:
Home Value: $625,000
Mortgage: $400,000
Amortization: 20 years
Minimum income to qualify: $105,000/yr
*This email is for generic understanding. Your file will be specific to you.
3 Year Fixed Rate Option:
A 3-year fixed rate would lock in your interest rate and payment for 3 years.
The thinking with a 3-year Mortgage term is we would be further away from the economic turbulence of the post-pandemic era. This would allow for inflation to cool and interest rates achieving a “new lower normal.”
This “new lower normal” is anyone’s guess.
You would be renewing your Mortgage again in 3 years, with the idea being you would renewing into this lower interest rate environment.
At renewal you can refinance your Mortgage, or change the structure of your Mortgage (E.X., adding a HELOC) without any Mortgage payout penalty.
The current bond yield curve is pricing a 3 year fixed rate about 0.25% higher than a 5 year fixed rate. So you would be paying a premium for the shorter duration Mortgage.
Let’s be reminded …nobody knows what the Mortgage market will look like in 3 years time. Trust me, I was not calling a global pandemic in 2018.
5 Year Fixed Rate Option:
Fixing into a 5 year term is longer duration, relative to a 3 year fixed term, so your next Mortgage renewal would be further into the future.
A 5-year fixed rate today is higher than pandemic era, and pre-pandemic era fixed rates.
The pre-pandemic era of fixed rates can also be labeled “post great financial crisis” rates.
That era of interest rate was lower as a result of “quantitative easing (QE).” Remember that term?
The pandemic era of interest rates kicked QE into overdrive lowering interest rates to basement bottom levels.
Knowing both of these fixed interest rate era’s were artificially manipulated lower through monetary policy might not be a fair comparison with today’s 5-year fixed interest rates.
With this context, locking into a 5 year fixed rate, at or around 5% (depending of if your Mortgage is insured, or not), might not be that bad?
Another thought with a 5-year term is there is less risk. Each time your Mortgage comes up for renewal, you are exposed to the market. You could be renewing into a lower, or a higher interest rate environment.
Some folks do not like to take risk with their Mortgage, and more of their risk exposure is in other areas of their financial life.
Variable Rate Mortgage Option:
Variable rates move up and down based on the Bank of Canada moving the key lending rate.
Movements of the key lending rate, trickle into moving the commercial bank Prime lending rate up or down. The Prime rate is tied to variable rate Mortgages.
The thinking in deciding on a variable rate would be the Bank of Canada would be cutting rates soon, and rather steeply.
Variable rates are higher than both the 3 year and 5 year fixed rate options. So you would be paying a premium for the downside exposure to Bank of Canada rate cuts.
At this time, I think good cases can be made for both steeper rate cuts, and a longer rate cut timeline.
I wish I could confidently advise on a highly likely interest rate outlook. The truth is nobody knows where rates will be 6-18 months from now.
The other side of the variable rate coin is rates could rise, again. We agree that is a low possibility based on the data we have now, but the reality is there would be upside interest rate exposure too.
Conclusion:
The outlook for interest rates is down. We are off the cyclical high of interest rates with the Bank of Canada set to possibly cut interest rates again later this year.
The big question is determining how low our “new normal” interest rate range might be?
Even if we flatten out at these interest rate levels, they are much lower than the recent peak of October 2023 …rates crested over 6.50%!
I’m having a lot of discussion about 3-year and 5-year fixed interest rates with my clients renewing, and purchasing.
Paying a premium for a 3-year fixed interest rate is appealing for people because they anticipate renewing into a lower interest rate two years sooner.
Many folks still opt for a 5-year fixed interest rate because their assessment is that rate is low (with a certain context) and they want the longer term security of locking in.
The variable rate option might gain more attention as the rate-gap between fixed and variable rates narrows, with more certainly on future rate cuts.
The monthly payments are as follows, based on $400,000 Mortgage with a 20 year amortization:
3-year fixed payment: $2,637/mo
5-year fixed payment: $2,583/mo
Variable rate payment: $2,793/mo
Let me know your thoughts …what would you choose (are you choosing)? 3 year, 5 year or variable rate?
Talk soon,
Chad Moore
P.S.
If you ever float on the Bow river between Ghost Dam – Cochrane, which I recommend, you’ll pass Wildcat Island.
Wildcat Island is a recognized provincial natural area (link). It’s about 500m long and 250m wide. Plan to stop there for a break. You can explore, have a fire (when not banned), or camp. I’ve done all three!
P.P.S.
If the possibility of moving homes is on your mind, check out this PDF I’ve written specifically for you. It’s for homeowners who are 6-18 months out from moving.
Over the past 10 years I’ve fielded questions from homeowners, and Realtors, about preparing to move. I’ve noticed that people start seriously thinking about this possibility about 1.5 years before pulling the trigger. This material is for you (link)!
