Obviously, such a thing is impossible. However, we can know from what renewal rate in 4 years it would be better to take the 5 year rate.
We will therefore determine this rate by analyzing the following case:
Hypotheses :
Amount borrowed: $ 200,000
Amortization: 25 years
Mortgage payments: $ 870.24 / month (same payments for both options).
Analysis:
For the mortgage balance of the two options to be the same in 5 years, the renewal rate in 4 years for a 1-year term would have to be 3.78 %. This therefore means that if the renewal rate is higher than 3.78%, then it is better to choose the 5-year closed rate and vice versa.
It would be surprising if in 4 years the rate for a 1 year term would be over 3.78%. This represents an increase of almost 2% compared to the current situation.
In this situation, we would then tend to recommend the term of 4 years.
It is important to note that each situation is unique. It requires a specific analysis of the client’s overall financial situation, as well as knowledge of his risk tolerance. A mortgage broker’s expertise goes beyond simply negotiating the best rates for your clients. Analyzes of the various options available should be carried out in order to reduce the cost of interest in the long run.
Is the increase in bond rates sustainable?
The massive injection of liquidity into the economy across the world, along with the ongoing vaccination, is expected to bring the global economy to strong growth. So there is no reason for bond rates to stay close to zero. So it makes sense to expect bond rates to be higher.
What to expect regarding mortgage rates?
The 5-year fixed mortgage rates evolved in the same way as the bond rates and exceeded the 2% mark. We can therefore expect to see fixed mortgage rates continue to rise. In this context, it would therefore be wise to make rate “reservations”.
The Bank of Canada (BoC) was the first central bank to cut its monetary easing program (Quantitative Easing). This action represents the first step in returning monetary policy to normal. With the reopening of the economy, we must agree to see the Bank of Canada announce the end of this program by the end of the year. In addition, with the current pace of vaccination, we can expect to see the pandemic over and the Canadian economy recovering a good part of the jobs lost in the coming quarters. Under these conditions, there will no longer be any need for the BoC to maintain its accommodative monetary policy, which suggests that a return to normal is approaching.
In this context, we can anticipate that the key rate will start to increase at the beginning of next year. In principle, this rate increase should be gradual and constant. Likewise, the variable rate may continue to obtain savings by the end of next year, but in our opinion, these savings are not substantial enough to recommend a variable rate at this time. It is in fact expected that its value will exceed the fixed rate during the year 2023. In addition, with a constant increase in the price of since the end of last year, the probabilities that inflation is not just transitory increase. considerably. The BoC could thus be tempted to increase the key rate more aggressively. For this reason, the current difference between fixed and variable rates is not worth the risk.
So call a mortgage broker to ensure that your client is benefiting from the best program available on the market.
Liability management is an integral part of a client’s financial situation and sometimes even “the” largest part. It is therefore essential to entrust the analysis of this to an objective professional who will know how to guide your client and ensure that he understands the value. After all, isn’t liability management in itself just as important as asset management?
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