short term fixed rate mortgage Loans are increasingly popular among Canadian homeowners and house hunters looking for the certainty of a fixed rate, but looking for more flexibility in their financing, experts say.
with bank of canada nearing its climax Rate of interest Trying to time the market and lock in lower rates along the way can be a tempting but risky endeavor, mortgage professionals who spoke to Global News said.
The Canada Mortgage and Housing Corp. (CMHC) said in a downgrade in the residential real estate report last week that its ratio fixed rate mortgage The number of holders is increasing for less than the standard five-year term until 2022.
CMHC data shows that shorter terms on fixed-rate mortgages have been on the rise in Canada since the beginning of the year. The graph shows the proportion of all mortgages originated or renewed in Canada for the indicated months.
In January, about 73 per cent of all fixed-rate mortgages originated or refinanced in Canada went with terms of four or five years, while only 11 per cent had terms shorter than that.
Since then, the popularity of short-term fixed-rate mortgages has grown steadily, it said.
The latest CMHC data available for July shows that 28 per cent fixed mortgage tenure was one to three years, while 45 per cent opted for four to five years.
Shubha Dasgupta, CEO of Toronto-based mortgage brokerage Pineapple, says clients are inquiring more about the potential for shorter-term mortgage products.
Dasgupta says that while many economists predict that the peak of interest rates may be nigh, some homeowners are expecting a fall in the cost of borrowing.
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“We are seeing more Canadians looking forward to what the interest rate landscape might be and trying to find a time… when interest rates could potentially come down in the coming years,” he said. it is said.
James Laird, co-CEO of the comparison site RateHub.ca, says there’s historical precedent that a slowing economy will be met with lower rates, and locking in two years today, for example, could potentially cost a homeowner Will allow renewal at a reduced rate. rate when their term expires.
But that being said, relying on history or even expert advice could set some mortgage holders up for disappointment when looking over multi-year horizons, he noted.
“We can try to predict where rates are going, but nobody knows,” Laird says.
Flexibility is as big a consideration as low rates
Generally, shorter-term mortgages offer better rates than the traditional five-year model, Laird and Dasgupta note.
Recession fears are one of the factors today, they say, keeping rates for shorter-term products either at par or slightly above their five-year counterparts.
Dasgupta says this could set you up for a miscalculation: If you lock in a short-term mortgage at a high fixed rate and then renew in a higher rate environment in one, two or three years, So whatever you have done is paid more with more uncertainty.
He says, “Timing the market is nearly impossible and has more to do with luck than planning.”
The stability of the five-year fixed-rate mortgage is a major factor in its popularity throughout much of Canada’s housing history, both mortgage professionals tell Global News.
“Canadians, generally speaking, like the stability of knowing what their monthly mortgage payment will be each month for the next five years. It allows them to budget properly and they can be mindful of their mortgage for a while. I can forget,” says Laird.
Variable-rate mortgages, which automatically see rates rise and fall with the Bank of Canada’s policy decisions, outperformed fixed-rate products in the second half of 2021 as homebuyers and refinancers took advantage of the option’s cheaper rates.
Dasgupta adds that variable rates and shorter-term mortgages share similar advantages because they offer more flexibility to homeowners than longer-term fixed products.
For homeowners who may be nearing a major life change that warrants a major renovation or relocation – a wedding, new baby or retirement and downsizing – he says these products can allow a change in mortgage product without Necessary to get out of the penalty. of a long term fixed rate product.
Variable-rate mortgages, meanwhile, are generally the most flexible products that come with the least expensive penalties for breaking.
Laird says that even though the spread has narrowed between variable and fixed rates, there is still a compelling reason for mortgage holders comfortable with a higher advance rate to go with a variable product.
“The penalty for breaking a variable is low, and if the rate decreases, a variable automatically adjusts your rate downward,” he says. “It is still a common strategy. Even in today’s increased rate conditions, people are still considering variable rates.
Despite the popularity of more flexible models, Dasgupta says that five-year fixed-rate products shouldn’t be expected to lose their status as the go-to mortgages for Canadians. The combination of “stability” and “general good market rates” at the five-year fixed rate give the option an enduring popularity in the hearts of homeowners, he argues.
“When it comes to mitigating risk versus reward, you get a lot of bang for your buck with a five-year fixed schedule.”
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