Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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It is very tempting to go for a fixed rate mortgage as the difference between fixed and variable rate is at its historical low.

Experts are advising (with OAC) consumers or home buyers to select fixed rate – citing future risk of raising interest rates.

Let us look at the risks in a fixed rate mortgage –

Your mortgage will be paid off after 25 years not 5.

  1. The term – Fixed Rate Mortgage – in Canada is an oxymoron. As in US – a fixed rate mortgage means a fixed rate over the life of the mortgage – in here the rate is fixed for the term of the mortgage. The terms are generally less than the amortization period (life span of the mortgage).  
  2. If you have a 25 years amortizing mortgage – your fixed interest rate will vary every five years. You can go for higher terms but at a ridiculously higher rate.

Therefore you are technically not risk free – against rate change – as you are slated to face your nightmare every five years. The only difference is – instead of facing the risk every day – you defer it for five years.

Do you have a plan?

  1. The most popular reason Canadians select a fixed rate mortgage is to have a constant monthly mortgage payment. Now the question is – if you prefer such a payment type then you must like to plan things ahead of time – Do you really have a plan?

You are locking in for five years you must have your five years plan. If you are running without a plan then you are ill prepared for the future.

Don’t you want to pay it faster?

  1. Most fixed rate mortgages come with restrictions on pre-payments. If – like many other Canadians – you are planning to pay your mortgage faster then you should look at the pre-payment options carefully.

This is even more important if you want to take the advantage of the existing low rate offers from the lenders.

Are you in a tight budget?

  1. Are you taking a fixed rate mortgage because your finances will be tight after you buy that house? Then have a budget ready and reconsider buying that home. You never know – that expensive home may sell for less in future.

Did you check the rate risk after the expiry of the term?

  1. The biggest jump of Canadian prime rate happened in (from 12.25% to 22.75% = 1050 bps) little less than 12 months in 1981. For the borrowers who preferred a fixed mortgage in 1976 came under real pressure when it was time for a renewal.

So, if you are selecting a fixed rate mortgage today and not looking at the probable future after five years then are not doing your due diligence. If you are thinking that let me buy the house today because I can qualify for the loan then you are fooling no one but yourself.

Are you getting a low-ratio un-insured mortgage?

  1. If you are in the market for a low ratio mortgage meaning if your loan to value is less than 80% then you are unlikely to get those discounted rates. Lenders want backing of mortgage insurers to securitize their loans. A conventional mortgage is not a suitable candidate in the eyes of many no-frills lenders.

Fixed rate mortgages are portrayed as lower risk than variable rate mortgages but once judged carefully – they both are risky. More risk or less risk depends on the perspective and situation of the judge. A mortgage loan is not about being qualified for it but also about planning and budgeting for it.

It will be better if we prepare a budget and a long term plan and then look at the right term – the job becomes much easier. There are much more in selecting a mortgage than just rate.

Shorter term fixed rate mortgages – like two or three years mortgages – are not discussed here as they all require a qualification rate check – in other words they are being treated by the regulators as risky as variable rate loans.