Shorter-Term Fixed-Rate Mortgages

Dec 8, 2022

Shorter-Term Fixed-Rate Mortgages

Recently, experts are noticing that shorter-term, fixed-rate mortgages are becoming increasingly popular among Canadian homeowners and house hunters seeking the certainty of a steady rate but looking for more flexibility in their financing.

As the Bank of Canada gets seemingly closer to the peak of its interest rate tightening cycle, people may look to time the market and try to lock in a lower rate. Doing this would be tempting, but it is a risky endeavour. That aside, we at GLM Mortgage Group do not believe that trying to time the market is a good idea.

You should always enter the market when you are financially prepared. If you time the market, you may not actually be financially ready, or you could take in extra fees you were not expecting, or you could get generally frustrated because the vision you had of what was going to happen did not go according to plan.

The Canada Mortgage and Housing Corp. has recently noticed in their fall residential real estate report this past week that fixed-rate mortgage holders opting for terms shorter than the standard five years has been growing since 2022. In January of this year, only 11 percent of all fixed-rate mortgages initiated or refinanced in Canada were shorter than 4 years. Fast forward to July, that number has risen up to 28 percent.

Why is this happening?

With recent news headlines, it has become apparent that the peak of interest rates could be seen in the near future. Homeowners are hoping to catch an eventual drop in borrowing costs. If a homeowner locks in their price for 2 years, they are hoping that by the time they are ready to renew, the rates will be lower

Although lower rates are very possible by looking at past history when an economy has slowed, it is important to understand that trusting history is not always the best way to make a financial decision. The economy today is very different from the economy 100 years, 50 years, even 20 years ago.

5 year term?

History shows that generally shorter-term mortgages offer better rates than the traditional five-year model. That being said, with fears of a recession looming, rates with shorter-term products are either on par or even slightly above their give-year counterparts. That means you could be drawing yourself to a miscalculation by locking in your rate at a higher fixed rate and then end up renewing in an even higher-rate environment in one, two or three years.

For these reasons, 5-year terms have been so popular in the past because it comes with a lot of stability and less stress about what the near future holds. This will give you stability, and possibly peace of mind when you go to bed every night.

Do we recommend 5 year terms?

Although it is evident that history leans on the success of a 5-year term as better then the success of a shorter term, we also think it depends on the risk you are willing to take. A 5-year term comes with great stability, but shorter-term mortgages can share similar benefits and provide flexibility in the near future. That is an obvious pro if the near future brings lower prices.

For these reasons, we do not think it is necessarily about timing the market, but rather what position you are in financially and the goals you hope to accomplish.

We would love to set up a time to chat and talk about the options that are present. We can discuss all of the options to see which ones may be better for you.

Timing the market can only be as good as the advice you get from a professional. Don’t let the market fool you, let us do the heavy lifting.

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