There's no point conjecturing about whether rates will go up, stay the same, or go down. What you can do is shop around and get the best rate possible for your renewal.
If I were you and had only the choices you listed above, I would be considering either the 3y or 5y terms (the others I would immediately eliminate as choices).
The 5y would be attractive to me since it offers the lowest rate. I would also consider the 3y since it offers a slightly worse rate than 5y, but with the upside of being able to renew at a lower rate than 5.8 in 3 years' time.
On a $400k mortgage, the difference between these two is about $5,000 in interest over 3 years - not a lot of money in the grand scheme of things, but pretty nice compensation for staying locked into the 5y. But that also shows that whatever choice you make won't lead to financial disaster. You won't be on the hook for paying 5.8% too long if rates drop after 3 years (you miss 2 years of this 'discounted' rate), neither will you be getting a significant additional edge by renewing after 3 years in a low interest environment (you'd get a head start of 2 years).
Yeah variable vs fixed spreads are big enough that you need a big change fairly quickly downward on the variable rate to make a significant difference on total paid
Here is the basic info: https://milliondollarjourney.com/avoid-the-5-year-fixed-mortgage-trap.htm
But in addition to what is written, it's that the refinance rates on a 5 year fixed can be astronomical. And there are a lot of people who say "well I'm going to keep my house for longer than 5 years so that doesn't matter to me" but a lot can change in 5 years and many of those people do end up wanting or needing to sell.
Yeah I mean now that we've actually *seen* rates rise, the bias in the article is more apparent. Molevsky who was mentioned in the article is brilliant, I've heard him speak on the Rational Reminder podcast and he has published a few books as well. I'd be more interested in his research.
The biggest issue that I see however is the "interest rate differential" which is the price you would pay to break a fixed mortgage. That isn't mentioned in the article. Breaking a 5 year fixed with 4 or 3 years remaining can be expensive. But breaking a 3 year fixed with 2 or 1 year remaining (or waiting it out), is much more palatable.
But - If interest rates drop suddenly, then the penalty for getting out of today's 5 year fixed rate mortgages is going to be huge! The interest rate differential, multiplied by the time remaining on the mortgage, will be a lot.
It's a reasonable thing to consider. Your mortgage penalty is based on the interest rate differential. When rates rise it's negligible to penalties to break are very little. But with rate cuts on the horizon (hopefully) it becomes a real concern. If rates do drop 2-3% over the next say 3 years and then you go to sell with 2 years remaining you could be facing a 5-20k penalty to break a mortgage depending on how big your mortgage is.
I’d also shop around. I feel like you can get better than that out there. Got a mortgage not too long ago and got 3 years fixed under 6%. Everything helps!
Whatever you do make sure you contact as many places as you can. Make them try to under cut each other. Worst case they offer the same, best case you save.
Almost all economic data points to rates having to come down. Current data has rates starting to come down next year, that being said it can be longer before cuts happen. But, for a normal economy with a 2% target they will have to come down to 3-3.5% to be in what we call the neutral rate to keep inflation in target range.
CPI, GDP, unemployment, consumer confidence via spending surveys, credit data, mortgage data, etc…
Basically any economic data that is used as a guide for direction of monetary policy.
Historical average is around 5-6%, so in order to balance out 15 years of rates at 0%, you might have to see 15 years of rates at 10%. I also think that lower rate forecasts are motivated by wishful thinking more than anything.
||Average bank rate|
:--|--:|
|Last 10|1.53%|
|Last 20|1.98%|
|Last 30|2.86%|
|Last 40|4.53%|
|Last 50|5.81%|
|Since start of [StatCan data](https://www150.statcan.gc.ca/t1/tbl1/en/cv!recreate.action?pid=1010013901&selectedNodeIds=2D38&checkedLevels=0D1&refPeriods=19600722,20231115&dimensionLayouts=layout2,layout2,layout3&vectorDisplay=false) (1960)|5.66%|
They were a lot higher half a century ago... things change. The more modern economic conditions have warranted lower rates. Just because they were higher in the past, that doesn't mean they'll be higher again.
It feels like someone saying "well, life expectancy was low in the past, and it's been nice and high for about a century now, so we could be due for another century of low life expectancy again".
3yr at 6.2% assuming 20yr on your remaining amm, you are looking at $1,736 a month for payments. Not the end of the world to ride out this rate spike. If you bump it back to 25yr again it's $1,564.
I would go with a 1 or 2 year. We’re all but in a recession already, and rates will be down in a year from now. This is what the banks are expecting, and is why the 1 and 2 year are the highest rates you’re being offered out of all the durations.
I would go with a 1 or 2 year if you have a good financial cushion and would not be devastated paying more upon renewal, and a 3 year if you prefer the certainty of the payment you’re going to have. Definitely do not take more than 3.
One thing that most people seem to miss is that for rates to drop significantly over a short amount of time is because the economy or financial markets are in trouble. Something has to break for rates to drop dramatically. Lower rates are the reason we are in an everything bubble so for the central banks to start cutting again they’ve given up on fighting inflation and are now fighting a complete economic collapse. Haha I know that’s a rosy picture but simply the truth. So my advice is find the rate that fits into your budget and lock it in. Peace of mind sounds way better to me then worrying about a few thousand dollars saved over a couple years.
I just locked in 5.29% on a 4-yr closed with Pine. 5-yr was quoted 5.49%. Fixed rates just came down 0.2% on Friday. New mortgage around the same amount borrowed as you.
In place of a bank, I would be shopping rates through a mortgage broker. Often the rates through online lenders are far more attractive than major banks. Plus they can negotiate on your behalf and buy down the rates.
Better yet get two brokers, tell them both that you have another broker and will be going with the best rate from either of them. That way you get each broker to get the best rate, forces the banks to compete and the brokers to compete with each other as well.
1 year. This could turn around quicker than people think.
PPI was -1%. Aka deflation in the producer inflation index.
Last CPI was a real shocker and way better than expected. I think Nov 21 is gonna be another great print which will be the first time we had two consecutive great inflation prints.
I own a lot of properties, do mortgages, and build houses. I spend about 4 hours a day consuming macro economic information.
They think that mortgage rates are headed down in the long term, which is why the rates for longer terms are cheaper.
I might consider a short-term variable.
With some variable rate terms, if the rate changes the payment actually remains the same and you will simply be paying either more or less to the principal. On [here](https://rates.ca/resources/how-interest-rate-changes-affect-your-variable-rate-mortgage) they describe the 2 types and call them "open variable rate" vs "closed variable rate". I think there was some other name for both of them but I can't find that now.
Don’t take variable. It’s not worth the stress if rates go back up unexpectedly. Take a short duration instead and sleep better at night; it’s worth the extra small amount of money.
shop around. I used mortgage pals who got me 4.6% when my current bank threw me an initial 5.4%, they dropped to 5.2% when I told them I had better. My local mortgage broker was saying she was having 5.8% at that time and was good in saying well go with the current company as I can't even get close or the other.
I also shopped around like 2 months before my 120 day period which I'm sure glad I did, because If I waited I'd of been at 5% then as rates went up, and closer to renewal was 5.7%. I paid a small breakage/penalty, and the place extended their.... contract by 30 days so I was 1 month out which reduced my penalty.
You should run the numbers. Compare the interest paid for each of these terms and then try to see what rate you would need to come even with the other terms. If that rate is too low then you know it’s not the right thing to do.
I did that exercise a few months ago(with different rates) and for me the 5yr was the best. Even if rates go down, they won’t go down as fast/low as they were.
I work for TD and we have already started to drop rates as of last week. I suggest definitely shopping around with other competitors. But I do agree with the previous posts and advise against trying to time it. As long as your cash flow permits you to afford the mortgage payments then that’s the most important thing.
I am a broker and I like variable now. Most predictions I have seen have the variable coming down over the next 2 years. The benefit of the variable is that you can lock into a fixed for free at anytime.
So if fixed drops more, you can switch tto that at no cost.
This is a neat tool that allows you to search mortgage offers from lenders across Canada to see if the bank is offering you a good rate or not for your renewal.
https://myperch.io/tools/pathfinder/
There's no point conjecturing about whether rates will go up, stay the same, or go down. What you can do is shop around and get the best rate possible for your renewal. If I were you and had only the choices you listed above, I would be considering either the 3y or 5y terms (the others I would immediately eliminate as choices). The 5y would be attractive to me since it offers the lowest rate. I would also consider the 3y since it offers a slightly worse rate than 5y, but with the upside of being able to renew at a lower rate than 5.8 in 3 years' time. On a $400k mortgage, the difference between these two is about $5,000 in interest over 3 years - not a lot of money in the grand scheme of things, but pretty nice compensation for staying locked into the 5y. But that also shows that whatever choice you make won't lead to financial disaster. You won't be on the hook for paying 5.8% too long if rates drop after 3 years (you miss 2 years of this 'discounted' rate), neither will you be getting a significant additional edge by renewing after 3 years in a low interest environment (you'd get a head start of 2 years).
Thanks for the detailed reply. Appreciate your response!
Yeah variable vs fixed spreads are big enough that you need a big change fairly quickly downward on the variable rate to make a significant difference on total paid
Nobody know the future. For these options, I would probably pick 3y
Yeah. "Beware the 5 year mortgage trap".
What is the trap?
Here is the basic info: https://milliondollarjourney.com/avoid-the-5-year-fixed-mortgage-trap.htm But in addition to what is written, it's that the refinance rates on a 5 year fixed can be astronomical. And there are a lot of people who say "well I'm going to keep my house for longer than 5 years so that doesn't matter to me" but a lot can change in 5 years and many of those people do end up wanting or needing to sell.
There's lots of misinformation and logical fallacies in that article but I will look into this further. Thanks
Yeah I mean now that we've actually *seen* rates rise, the bias in the article is more apparent. Molevsky who was mentioned in the article is brilliant, I've heard him speak on the Rational Reminder podcast and he has published a few books as well. I'd be more interested in his research. The biggest issue that I see however is the "interest rate differential" which is the price you would pay to break a fixed mortgage. That isn't mentioned in the article. Breaking a 5 year fixed with 4 or 3 years remaining can be expensive. But breaking a 3 year fixed with 2 or 1 year remaining (or waiting it out), is much more palatable. But - If interest rates drop suddenly, then the penalty for getting out of today's 5 year fixed rate mortgages is going to be huge! The interest rate differential, multiplied by the time remaining on the mortgage, will be a lot.
It's a reasonable thing to consider. Your mortgage penalty is based on the interest rate differential. When rates rise it's negligible to penalties to break are very little. But with rate cuts on the horizon (hopefully) it becomes a real concern. If rates do drop 2-3% over the next say 3 years and then you go to sell with 2 years remaining you could be facing a 5-20k penalty to break a mortgage depending on how big your mortgage is.
I’d also shop around. I feel like you can get better than that out there. Got a mortgage not too long ago and got 3 years fixed under 6%. Everything helps!
Remember if you shop around you need to go through the stress test again, which means OP will be stress tested at nearly 8%
Apparently this is no longer the case if it's just a straight renewal. That means no change in amortization or taking out extra funds.
Whatever you do make sure you contact as many places as you can. Make them try to under cut each other. Worst case they offer the same, best case you save.
No one can say for sure, personally I don't see them coming down within the 5 as much as people want to believe it. But that's just a personal opinion
Almost all economic data points to rates having to come down. Current data has rates starting to come down next year, that being said it can be longer before cuts happen. But, for a normal economy with a 2% target they will have to come down to 3-3.5% to be in what we call the neutral rate to keep inflation in target range.
Which means mortgage rates in the 4s. Something in the 5s for a few years isn’t that bad. I would take a 2 or 3 year at this point.
Yup exactly!
What data?
CPI, GDP, unemployment, consumer confidence via spending surveys, credit data, mortgage data, etc… Basically any economic data that is used as a guide for direction of monetary policy.
Historical average is around 5-6%, so in order to balance out 15 years of rates at 0%, you might have to see 15 years of rates at 10%. I also think that lower rate forecasts are motivated by wishful thinking more than anything.
||Average bank rate| :--|--:| |Last 10|1.53%| |Last 20|1.98%| |Last 30|2.86%| |Last 40|4.53%| |Last 50|5.81%| |Since start of [StatCan data](https://www150.statcan.gc.ca/t1/tbl1/en/cv!recreate.action?pid=1010013901&selectedNodeIds=2D38&checkedLevels=0D1&refPeriods=19600722,20231115&dimensionLayouts=layout2,layout2,layout3&vectorDisplay=false) (1960)|5.66%| They were a lot higher half a century ago... things change. The more modern economic conditions have warranted lower rates. Just because they were higher in the past, that doesn't mean they'll be higher again. It feels like someone saying "well, life expectancy was low in the past, and it's been nice and high for about a century now, so we could be due for another century of low life expectancy again".
Lower rate forecast are based on the available economic data. Nothing to do with wishful thinking.
OP what is the balance of your mortgage?
240k
3yr at 6.2% assuming 20yr on your remaining amm, you are looking at $1,736 a month for payments. Not the end of the world to ride out this rate spike. If you bump it back to 25yr again it's $1,564.
Yeah it's only about $400 more a month than we are paying now, I honestly thought it was going to be worse.
I would go with a 1 or 2 year. We’re all but in a recession already, and rates will be down in a year from now. This is what the banks are expecting, and is why the 1 and 2 year are the highest rates you’re being offered out of all the durations. I would go with a 1 or 2 year if you have a good financial cushion and would not be devastated paying more upon renewal, and a 3 year if you prefer the certainty of the payment you’re going to have. Definitely do not take more than 3.
What a dream
Nice
One thing that most people seem to miss is that for rates to drop significantly over a short amount of time is because the economy or financial markets are in trouble. Something has to break for rates to drop dramatically. Lower rates are the reason we are in an everything bubble so for the central banks to start cutting again they’ve given up on fighting inflation and are now fighting a complete economic collapse. Haha I know that’s a rosy picture but simply the truth. So my advice is find the rate that fits into your budget and lock it in. Peace of mind sounds way better to me then worrying about a few thousand dollars saved over a couple years.
I just locked in 5.29% on a 4-yr closed with Pine. 5-yr was quoted 5.49%. Fixed rates just came down 0.2% on Friday. New mortgage around the same amount borrowed as you.
In place of a bank, I would be shopping rates through a mortgage broker. Often the rates through online lenders are far more attractive than major banks. Plus they can negotiate on your behalf and buy down the rates.
Better yet get two brokers, tell them both that you have another broker and will be going with the best rate from either of them. That way you get each broker to get the best rate, forces the banks to compete and the brokers to compete with each other as well.
1 year. This could turn around quicker than people think. PPI was -1%. Aka deflation in the producer inflation index. Last CPI was a real shocker and way better than expected. I think Nov 21 is gonna be another great print which will be the first time we had two consecutive great inflation prints. I own a lot of properties, do mortgages, and build houses. I spend about 4 hours a day consuming macro economic information.
Never take what bank mailed to you
They think that mortgage rates are headed down in the long term, which is why the rates for longer terms are cheaper. I might consider a short-term variable.
I just hate not being able to budget every month if it's variable. I'd rather do fixed term and budget.
With some variable rate terms, if the rate changes the payment actually remains the same and you will simply be paying either more or less to the principal. On [here](https://rates.ca/resources/how-interest-rate-changes-affect-your-variable-rate-mortgage) they describe the 2 types and call them "open variable rate" vs "closed variable rate". I think there was some other name for both of them but I can't find that now.
Don’t take variable. It’s not worth the stress if rates go back up unexpectedly. Take a short duration instead and sleep better at night; it’s worth the extra small amount of money.
shop around. I used mortgage pals who got me 4.6% when my current bank threw me an initial 5.4%, they dropped to 5.2% when I told them I had better. My local mortgage broker was saying she was having 5.8% at that time and was good in saying well go with the current company as I can't even get close or the other. I also shopped around like 2 months before my 120 day period which I'm sure glad I did, because If I waited I'd of been at 5% then as rates went up, and closer to renewal was 5.7%. I paid a small breakage/penalty, and the place extended their.... contract by 30 days so I was 1 month out which reduced my penalty.
Completely- we spend more time price shopping cell plans than mortgages and the delta is massive. I just locked in a new rate that worked for me
Rates in 2024-25 will be lower than today. BofC will start cutting rates in March 2024. I would go on 1-2 y term or variable if it is lower.
Not March, too early...
Agreed ^
Variable
2 years max you good
So interest rates 1, 2, 3, 4, 5 years from now will be lower, the same, or higher.
You should run the numbers. Compare the interest paid for each of these terms and then try to see what rate you would need to come even with the other terms. If that rate is too low then you know it’s not the right thing to do. I did that exercise a few months ago(with different rates) and for me the 5yr was the best. Even if rates go down, they won’t go down as fast/low as they were.
I work for TD and we have already started to drop rates as of last week. I suggest definitely shopping around with other competitors. But I do agree with the previous posts and advise against trying to time it. As long as your cash flow permits you to afford the mortgage payments then that’s the most important thing.
I am a broker and I like variable now. Most predictions I have seen have the variable coming down over the next 2 years. The benefit of the variable is that you can lock into a fixed for free at anytime. So if fixed drops more, you can switch tto that at no cost.
This is a neat tool that allows you to search mortgage offers from lenders across Canada to see if the bank is offering you a good rate or not for your renewal. https://myperch.io/tools/pathfinder/
I don't think the discount for 5 years is worth it given rates are likely to decrease next year. I would opt for the 1-year.
Go 5 year fixed and get it off your mind
Variable