Rates have nowhere to go but up.
Or at least, that’s what everyone keeps telling us. Banks, economists, mortgage brokers, even Finance Minister Jim Flaherty is insisting that interest rates will start to climb later this year.
And yet, they keep going down. The mortgage establishment continues to drop interest rates, pushing long-term fixed mortgage rates like they’re going out of style. Which might be the case. With no clear sign of imminent rate hikes, borrowers are beginning to consider shorter term options in order to maximize their savings.
Avoiding Variable Rates
Locking in a long-term fixed rate isn’t for everyone. However, the current variable rate discount isn’t much to write home about. The current rate is a stingy prime minus 0.25 percent (2.75 percent). As such, the overall savings of this rate pales in comparison to the rate security of the more popular 3.09 percent five-year fixed best rate mortgage.
An Often Overlooked Option
The lacklustre variable market has caused many mortgage brokers and borrowers to show a renewed interest in the oft overlooked one-year fixed rate mortgage. According to the Canadian Association of Accredited Mortgage Professionals, only one in every 16 mortgage shoppers opts for this product. Until recently, that is. One-year fixed mortgages rates are currently selling for just 2.39 percent. That’s the rate equivalent of prime minus 0.61 percent, a decent variable rate according to past numbers.
Why The One-Year Fixed is So Attractive
Both variable rates and one-year fixed rates are highly dependent on what the Bank of Canada’s overnight rate. Bond market traders, who are the most likely to put their money where their forecasts are, are currently wagering on a rate cut in the next year rather than a rate hike. This makes a one-year term slightly more attractive than other longer-term options.
It’s also far easier to avoid mortgage penalties with a one-year fixed rate mortgage. If you need to change your mortgage or make a lump-sum payment, you don’t have to wait long for your renewal date. Some one-year best rate mortgages are even convertible, which means they give you the option of switching to a five-year fixed rate without penalty (the only drawback is the rate your receive when converting won’t be the absolute lowest available).
Disadvantages of One-Year Fixed Rate
As with any mortgage product, you must consider the bad with the good. Here are some shortcomings to keep in mind when considering this best rate product:
- Increased Rate Risk
The interest rate resets more often on a one-year fixed rate. This means that if your rate increases by 1 percent you could see a spike in your payments of roughly $50 per $100,000 of your mortgage.
- Re-qualification Risks
You could find it more difficult to switch lenders or get re-approved upon renewal, especially if your employment changes or your finances deteriorate.
- Frequent Renegotiations
Haggling with your lender once a year can be exhausting. A mortgage broker can help you handle this task.
- Stiffer Upfront Qualifications
Borrowers often find it harder to qualify for a one-year fixed rate than a five-year fixed. Lenders often make you prove yo can afford much higher payments in case rates increase prior to your renewal.