I hear here and there that it is time to “fix” the rate on his mortgage, in order to have peace for the next five years. From 2% interest, we would no longer be on the eve of reviewing that, with rising inflation and the intervention of the Central Bank that this supposes to calm things down. And the rate on bonds which has started to rise. ascend…
I’m not far from agreeing, but before you tie your hands on a five-year fixed rate mortgage, take your thinking a step further. Otherwise, you might regret your decision.
What is the risk ? What are the options?
Obsession with the rate
Already, when a loan of $ 200,000 was enough to acquire a bungalow 30 minutes from Montreal, buyers only had eyes for rates. Now that you have to borrow twice as much to get hold of the same house, imagine how this obsession could have been turned.
With today’s outsized mortgages, it’s true that even the smallest rate discount can have a tangible effect on monthly payments. In an environment where interest is set to rise, I also understand that we want to protect ourselves with a fixed rate.
Attention, the best deals usually come with a pair of handcuffs. To break free, you need thousands, if not tens of thousands of dollars.
Manage risk
We do not think about it, because it is the result of an unforeseen event.
A prepayment penalty is the consequence of another event that requires you to resell your property.
One of the common causes is separation. But it can also be a happy element, such as the arrival of a new member in the family or the discovery of a soul mate who uproots us from celibacy (and the condo).
Whatever the reason, at the current price of real estate, we don’t want to take the risk of leaving so much money on the table in mortgage penalties. This cost is in addition to the commission paid to the broker, the moving costs and the Welcome tax that awaits us at the new address.
The variable rate mortgage does not contain such a painful penalty, it is limited to the equivalent of three months of interest. Is this the solution? It is often the best. The upfront cost is always more advantageous, although it may exceed that of the fixed rate over the five-year term.
Does that worry you? There are intermediate solutions. You can separate the mortgage into two installments, one with a variable rate and another with a fixed rate.
Another possibility: consider a fixed rate loan on shorter terms, of 4, 3 or 2 years, depending on your situation. It costs less than the standard five-year formula, the risk of having to break it is lower, and if it does, the breach of the contract will be less painful for the portfolio.
For active debt management
Ryan La Haye, mortgage broker at Planiprêt, advocates a strategic approach to mortgage debt. According to him, the scale of today’s loans requires “active debt management”. “As we do with our investments, which we periodically adjust according to the mood of the market,” he says.
- Each year, we should analyze all of our debts.
- One must assess the appropriateness of changing or modifying one’s mortgage whenever market conditions offer an opportunity to reduce costs.
- To be able to actively manage your debts, the mortgage must have as few obstacles as possible.
- The variable rate loan is the most flexible. With a fixed rate, it is better to pay more in interest in return for more accommodating terms. To check: authorized prepayments, amount of penalties, possibility of transferring the loan to another property.
- A home equity line of credit also provides a lot of flexibility.
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