I talked about Mortgages the other day and spoke about how to approach your mortgage and picking a term and product, you can listen here.
https://anchor.fm/letstalkaboutitfinance/episodes/Lets-Talk-About-Debt–Mortgages-and-Home-Prices-e1jb0npSo what are we looking at today? How to actually compare different mortgage products.
I’m going to be taking this from a Canadian perspective, so let’s look at some example interest rates across some fixed and variable terms.
| Mortgage Product | Rate (%) |
|---|---|
| 1 Year Fixed | 3.39 |
| 2 Year Fixed | 3.99 |
| 3 Year Fixed | 4.19 |
| 3 year Variable | 3.70 |
| 4 Year Fixed | 4.44 |
| 5 Year Fixed | 4.34 |
| 5 year Variable | 3.00 |
| 7 Year Fixed | 4.93 |
| 10 Year Fixed | 5.09 |
| 25 Year Fixed | 9.75 |
So this is a big wall of numbers, how do you determine what’s best for you?
The first step is to understand how long you want to be in your house, to avoid penalties it’s best to break a mortgage when it’s term comes up. If you know you’ll be moving in two years, a two year mortgage term is going to make more sense then a five year, because you’ll have the opportunity to review your situation in two years.
It’s also a good practice to review the overall rates available in different terms just to see if you’re getting a good deal. Depending on a bank’s internal balance sheet, they may be discounting different mortgage terms, as you can see above you can get a 5 year mortgage term for less then a 4 year mortgage term, when typically mortgage rates should rise the longer out the term is.
I’ll be putting together a blog post on how mortgage rates work in the future.
Those are also fluid numbers, they can change even day by day, so when you’re looking to get a new mortgage or renew a mortgage always look at the whole suite of rates that are being offered, and different institutions.
I also want to reiterate the difference between variable and fixed mortgages. Variable mortgages can be a cheaper option, or they can be a more expensive option then a fixed rate mortgage, and there’s no way to determine that at the time. Depending on how the bank’s prime rate moves, you could pay more or less. If you pay more, and you don’t increase your payments you could get behind on your mortgage amortization and on your next renewal have a increase in your mortgage payment (a potentially large one too depending on what’s gone on.) This is because you always pay the interest first on a mortgage payment, if the rate goes up, your interest eats up more of that payment and thus you’re not paying enough principal.
If you’re choosing a variable rate mortgage because it’s cheaper and you’re stretched financially, then you can really end up in a tough spot. For a degree of safety I would look at paying extra on a variable mortgage so you have some cushion if rates rise.
The other option to look at is closed versus open mortgages. An open mortgage won’t have a prepayment penalty, but is often more expensive. If you’re in the process of selling your home, or you are looking to pay off or pay down your mortgage, then an open mortgage gives you that flexibility.
The main concern with any mortgage is that you’re getting the deal that makes the most sense to you, and that doesn’t necessarily mean the cheapest rate, but the one that works best for you.