In recent years, Canadian homeowners are unaware of their traditional preference for Security and opt for the potential savings offered by a variable rate mortgage. Under this type of mortgage, the rate paid is aligned with the bank’s prime rate – which currently fall steadily and reached a historic high. The higher the rate goes down, the more you save.
But how far can it go? We are seeing a turnaround because the Canadians have now concluded that the rate is unlikely to drop further – which makes long-term mortgages again very interesting. The enthusiasm of the owners deal with this type of mortgage loan is renewed, for some, the higher the mortgage is long, the better.
Investigate this change more closely.
Of course, the right mortgage is always dependent on other factors, including your personal financial situation and your risk tolerance. The job of your mortgage broker is to help you find the best value while managing risk. Although a long-term mortgage offers the security of knowing exactly what will be the rate for five years, you run the risk, ultimately, to pay more interest with a variable rate mortgage if the rates drop. The variable rate mortgage is advantageous when interest rates are down, but if rates begin to rise, you may regret not having stuck with one rate mortgage term. Both options have theoretically risk.
Homeowners who have a variable rate mortgage have a pretty good situation for several years – while rates continue to decline. However, as mortgage rates have been trending down for so long, it’s easy to forget certain historical trends. Between 1976 and 1981, for example, interest rates have gone from a “low” of around 11% to a high of about 21%. Rates have therefore doubled in five years. This may sound terrible, but it is those who have blocked their mortgage to 11% who got lucky.
That’s sobering. Owners who watched the mortgage market at that time have become cautious buyers and the preference for fixed rate mortgages has characterized the borrowing habits for nearly twenty years. Later, when rates began a steady descent, the preference for long-term mortgage dissipated. Why do they come into force?
While no one predicts the recurrence of a scenario like that of 1981 over the next few years, very few experts predict the continued downward trend exhibited by mortgage rates. It is logical to believe that we are approaching the bottom. As rates are unlikely to decline much, the so-called “risk” posed by the mortgage term is eliminated. After all, it is unlikely that you take out a mortgage for five years now and that you attend a fall of 4% during this period.
A unique opportunity to lock in their mortgage rates lowest in history is offered to Canadian homeowners. Some owners who have blocked their loan at a great rate a few years ago are even willing to pay an indemnity for early repayment to enjoy a new mortgage at a rate even longer today.
It is easy to see now how far rates can fall, is now talking about fractions only. So for a very low risk (lower rates), you can take advantage of the benefits of a traditional mortgage long-term security of information – no matter what the market rates – you can plan your payments throughout the term of your loan