How to pick the right mortgage amid growing uncertainty over rates
How to pick the right mortgage amid growing uncertainty over rates
Special to The Globe and Mail September 21, 2017 September 21, 2017 If you got a mortgage last year, you snagged one of the lowest rates in history. Last September, folks were getting five-year rates at never-before-seen numbers, such as 2 per cent. What a difference a year makes. Today, most rates on Canada’s predominate mortgage – the five-year fixed – are north of 3 per cent. In just the past three months alone, the five-year government yield – which leads fixed mortgage rates – has rocketed 75 per cent higher. Despite mounting funding costs, some lenders had delayed their rate increases. Concerns over a slowing housing and mortgage market have them trying to extract every last ounce of business they can, especially with the banking regulator (OSFI) expected to tighten mortgage regulations further this fall. But the gap between bond yields and mortgage rates can only shrink so much before profit margins are unsustainable. So, almost every lender has now fully adjusted its rates to match higher yields. All of this has many mortgage shoppers sweating over where rates go next. On the one hand, we hear economists chirping about three to four more hikes by the end of next year. Then we have the Bank of Canada suggesting its “neutral” rate (the rate needed to keep inflation on target) could be up to two percentage points higher, maybe more. On the other hand, inflation (the No. 1 rate driver) is mocking those expert forecasts by defiantly hanging around multiyear lows. If only we knew … If you could be sure that rates would leap more than a percentage point higher in the next year or so, and you knew that you wouldn’t be changing your mortgage again for five years, a five-year fixed would be a lock, mathematically speaking. You’d likely save more interest in a five-year term than any other. For those of us who aren’t rate clairvoyants, it takes more work to pick a term. Fortunately, there are five important truths you can lean on:
Given the above, one might argue that the real risk to well-qualified borrowers is not skyrocketing rates. The real risk is locking into a fixed term for too long. How to play it That brings us to our mortgage strategy du jour. There are two broad types of creditworthy borrowers (actually, there are many types but this column’s only so long so I’ll simplify): Borrower #1: The risk averse homeowner with a hefty mortgage: This is someone who: (a) has a big fat mortgage relative to their income and/or (b) can’t bear the thought of their interest costs spiralling higher, and (c) won’t need to break or significantly increase their mortgage before 2022. For this homeowner, today’s five-year fixed terms near 3 per cent look mighty fine. And yes, despite the runup of late, 3 per cent is still a low price for long-term rate serenity. Borrower #2: The risk-tolerant financially secure homeowner: This is someone who: (a) understands that rates are cyclical and don’t go up forever, (b) has reasonable debt ratios, sufficient equity and savings and/or (c) is repulsed by mortgage penalties and grovelling to their existing lender for a good refinance rate (in the event they have to refinance before their mortgage matures). If this sounds like you, steer clear of the five-year fixed. Check out these terms instead …
Picking a mortgage has always been about tilting the odds in your favour to the greatest degree possible. That requires comparing the rates for each term, considering your interest costs under the best and worst likely scenarios for rates, making assumptions about your future lifestyle and finances and matching that all up with each mortgage’s features. If you don’t want to do this yourself, find a mortgage adviser who’s willing to compare different rate scenarios for you. Not all will, but there’s 20,000-plus lenders and brokers in this country so you can always move on to the next one. |
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