Choosing your mortgage term is by no means an easy task, it’s hard to determine what the right term is without knowing where interest rates are headed in the future. For example, do you expect a mortgage rates to rise quickly in the near future? Or do you expect interest rates to remain stable in the coming years? The answers to these questions can help identify what the right mortgage term, but at the end of the day it’s still a bit of a gamble – so what can you do to lock down the most strategic mortgage term?
Erroneous rate expectations are some of the leading causes behind not getting the lowest-cost mortgage. In fact, Canadians often choose 5 year mortgage terms because of a fear of mortgage rate increases and many lending institutions play into that fear because they have incentives to lock you down for a longer term which more often than is not the term that’s best for you.
What do the experts think?
Bank analysts as well as industry leaders are speculating interest rate increases by the summer of 2014. However in the past several years we have seen analysts make the same claims only to continuously push their rate speculations further back. Still it should be mentioned that most analysts today are not predicting lower rates.
The Globe and Mail reports that there is research showing an upwards bias to rate speculations exhibited by many economists, so it’s hard to really identify if their predictions hold any weight.
What about the bond market?
In Canada, mortgage rates have historically sat at around 1.5% higher than the 5-year bond yield. A fall or rise in the bond yields can predict a similar fluctuation on the mortgage market – given that Canada’s Finance Minister Jim Flaherty let’s it happen (Jim Flaherty was strongly opposed to the low mortgage rates offered by BMO earlier this year).
So what do you do?
Do you lock your rate down for a year and expose yourself to the potential downside? It’s not easy to say; you will have to come to that decision yourself. The best thing you can do is seek personalized advice. However, do not forget that no one can 100% accurately predict how mortgage rates will change over time so be wary of the advice you get.
Lock your rate in advance when it’s time to renew
One of the best strategies somebody with a mortgage can take on is to lock down a mortgage rate well before the mortgage term ends. This can protect you from a short term rate increase and will let you evaluate which term is right for your next mortgage cycle early on. Many lending institutions now provide rate-locks of 3, 4 and up to even 6 months – so taking advantage of this is a no-brainer!
