It is very common to ask us for the lowest rate. Unfortunately we assume that a bargain basement rate will save us a basement full of cash – which is not always true. In fact interest rate is just another factor to consider – along with many other factors – rate term is one of them.
Rate term is like a contract period between the mortgagor and the mortgagee. Within this period the interest rate or rate discount remains the same based upon some conditions, those conditions are called standard charge terms.
Rates:
before we jump into the details of terms, we need to do some analysis on rates. Following is an example to show how interest rate can change the payment amount.
Say, Lender A, was offering 0.05% lower rate compared to Lender B. You decided to pass Lender B as their rates were higher, since we put too much importance on interest rare – often we fail to compare the complete packages side-by-side.
A $300,000.00 fixed rate mortgage with 25 years amortization the difference in monthly payment on an interest difference of 0.05% would be roughly $8.00 a month.
After couple of years in the new home you found out another job with a fabulous pay. So, by paying $15,000.00 in penalties you moved on.
You may find out that the penalty from Lender A would have been $12,000.00 in the similar situation. You may also realise that a three years term was a better option as it had lower rate and shorter term. You are not alone, more than 50% of Canadians break their mortgage contract before the term expires.
Terms:
There are many mortgage terms available. At present five and three years terms are most popular. You can also get 6 months, one year, two years terms etc. Ten years and higher terms are also drawing some serious attentions recently.
The tricky part is to select the right one. Shorter terms are good alternatives to variable rates. Longer terms provide shelter against the risk and uncertainty of interest rates.
Your personal situation is an important factor while selecting a term. If you are
- Going to sell a property soon.
- Waiting to get a better rate.
- Not sure what you are going to do in future.
In the above situations shorter terms may work better for you. You can also look for open term mortgages but generally those are expensive.
There are also all-in-one type loans where all your loans are consolidated in one. They are normally secured line of credit type loans and some offer re-advancing feature. Generally HELOCs comes with higher interest rates compared to a closed term mortgage.
If you are sure that you are long-term player then probably you should look into longer terms.Following are few typical conditions when you may want to consider a long term loan.
- You have a stable job.
- Size of your family will remain same in future.
- You do not want to down-size.
- You do not plan to take substantial amount of equity out of your home.
As of now long-term variables are not very attractive as they do not offer rates as good as fixed rates but as the interest rate stays low and banks fight more for business along with BOC playing conservatively – the discounts will reappear in future. For now they are not so good.
Five years fixed rates are hovering around 3% and three years are about 25bps lower than that. On a $100,000.00 – 25 years amortization loan – the monthly payment is $473.25 for 3% interest rate. It goes down to $460.51 if the rate was 2.75%. A premium of $13 a month for extra two years of protection. A total $470.00 premium over three years. Not too much to pay if that five years loan would not land you in a renewal time when the rates are high already. This is something to consider while thinking about a five years fixed loan.
If you are on border-line then to qualify under GDS / TDS – a five years loan might be your only option. To buy a home – pushing yourself to the limit is strongly not recommended.
As usual rates are rates. They change often.
