That’s the Taco Bell slogan. It’s meant to remind us that fast food doesn’t end up with hamburgers. In the world of mortgages, the closest equivalent to “the bun” is the 5 year fixed mortgage. It has been the most popular mortgage/term in Canada for decades. Why? Because Canadians are(generally speaking) ‘risk averse’ and so we pay a hefty premium for ‘safety’ and ‘peace of mind’ by choosing a fixed rate versus a (lower) rate tied to prime.
Like the weather we seem to constantly talk about ‘rates’. By the way, the last place you should ask about where rates are headed is the bank, who last week predicted a two per cent hike in the next two years. OK. Here’s a tip, they are likely to be wrong again. Two years ago they said the same thing. We thought the era of ultra low rates was ending. Wrong. Has the party ended for good, or will rates increase for a year only to decline again? Folks, nobody really knows, and predictions have proven to be highly inaccurate. So don’t ask the bank their opinion about rates because their response will likely be short sighted.
So why does it seem the banks(like the media always try to put fear into us. And why do the banks always tell us to ‘lock in’ to a fixed rate if we have a variable? The answer is to make us act(panic) from fear, so they will make more profit. Did you know, that over 70 per cent of 5 year fixed rate mortgages are redone every 3.5 years. What this means is that the banks also get a ‘penalty’, usually thousands of dollars from fixed rate mortgages. If you were in a variable or 3 year fixed term mortgage, you would have little or no penalty AND you would also save thousands in interest. Factor the penalty into the ‘effective’ interest rate and you are paying a fixed rate even higher than you think.
We always say “pay yourself the spread, not the bank. “this is how you will ‘REALLY’ get ahead. For example, a 3 year fixed 3.35% $300,000 mortgage with a 25 year amortization will save you approximately $4,676 over 3 years, and $7,795 interest savings(that’s no chump change)over 5 years currently at 4.14%. And get this, if you were to make the equivalent of the 5 year fixed payment(1,600.91versus the required payment(1,474) of your 3 Year mortgage, you will pay your mortgage down much faster saving thousands more. Choose a variable mortgage tied to prime, currently .75% below prime or 2.25%, your interest savings over 3 years is around $10,590, and $17,650 versus choosing a 5 year fixed rate mortgage. That’s a lot of money!
So folks you can see what a ‘huge’ premium you are paying when you take a 5 year fixed rate. If you are a first time buyer, or you have a large mortgage(little equity) and consumer debt, it makes complete sense for you to go with a fixed rate. Otherwise there is great merit in considering several other options which we will discuss next week.
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