{"id":24348,"date":"2024-07-31T11:11:15","date_gmt":"2024-07-31T18:11:15","guid":{"rendered":"https:\/\/www.roryc.ca\/blog\/?p=24348"},"modified":"2024-07-25T08:50:35","modified_gmt":"2024-07-25T15:50:35","slug":"shorter-mortgages-are-better-flexibility-is-the-name-of-the-game","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2024\/07\/shorter-mortgages-are-better-flexibility-is-the-name-of-the-game\/","title":{"rendered":"Shorter Mortgages are Better &#038; Flexibility is The Name of The Game"},"content":{"rendered":"<p style=\"text-align: justify;\">If you\u2019re shopping for a new mortgage, or coming up for renewal, you likely wish you had a crystal ball. Picking the \u201cright\u201d mortgage rate is tricky at the best of times, but it requires an extra dose of strategy when borrowing costs are trending lower.<\/p>\n<p style=\"text-align: justify;\">Today\u2019s variable mortgage rates remain elevated, and there\u2019s plenty of uncertainty about how much lower they\u2019ll go \u2013 and how quickly. Locking into a fixed-rate mortgage, however, could find a homeowner stuck with a high-interest mortgage long after rates start to ease.<\/p>\n<p style=\"text-align: justify;\">So what\u2019s a savvy borrower to do?<\/p>\n<p style=\"text-align: justify;\">A common strategy over the past year has been to take out a fixed-rate mortgage with a shorter term. This offers borrowers the ability to make a change to their mortgage sooner \u2013 ideally when rates fall \u2013 while providing protection from unexpected rate volatility. A three-year fixed-rate mortgage has been especially popular as an alternative to the traditional five-year mortgage.<\/p>\n<p style=\"text-align: justify;\">But the best time to have taken out a three-year mortgage was a year ago. Today, shorter is better, and flexibility is the name of the game. Two-year fixed-rate mortgages are the new ideal option for borrowers looking to take full advantage of incoming lower rates.<\/p>\n<p style=\"text-align: justify;\">That\u2019s because markets now believe the Bank of Canada will hit the bottom of its rate-cutting cycle in 2025. After promising inflation reports both in Canada and the United States, our central bank is expected to cut its benchmark rate by a full percentage point this year \u2013 in the form of three more 25-basis-point decreases \u2013 and by another percentage point next year.<\/p>\n<p style=\"text-align: justify;\">That would lower the bank\u2019s overnight lending rate to 3 per cent in 2025, which would be within its perceived \u201cneutral\u201d rate range of 2.25% to 3.25%, the point at which it neither stimulates nor restricts the economy. Should that materialize, the lowest available five-year variable-rate mortgage would be in the realm of 3.95%. Assuming fixed-rate mortgages follow suit, five-year options could be as low as 2.89%.<\/p>\n<p style=\"text-align: justify;\">But many of today\u2019s borrowers can\u2019t wait until 2025 \u2013 they\u2019re purchasing a home or coming up for renewal now. For this group, a two-year fixed-rate mortgage will allow them to re-enter the mortgage market at precisely the right time. They can then lock into a much lower five-year fixed rate or perhaps make the choice to go variable.<\/p>\n<p style=\"text-align: justify;\">And, as the spread \u2013 the cost difference \u2013 between two-year and five-year terms has narrowed, it makes short-term financial sense, too.<\/p>\n<p style=\"text-align: justify;\">One way to determine if you\u2019ll come out ahead with a two-year term is to compare what you\u2019d pay with a traditional five-year mortgage against the two-year plus the first three years of the (hopefully) lower five-year you\u2019d renew into in 2025.<\/p>\n<p style=\"text-align: justify;\">As an example, let\u2019s say you take out a two-year fixed mortgage at a rate of 5.54% (which is 0.89% higher than today\u2019s lowest five-year option). We\u2019ll assume you\u2019re purchasing a house for $696,179 (the national average in June, according to the Canadian Real Estate Association) with a mortgage amortization of 25 years.<\/p>\n<p style=\"text-align: justify;\">Crunching the numbers in Ratehub.ca\u2019s mortgage payment calculator, we find that by the end of the two-year term in 2025, our borrower has paid a total of $94,994 on their mortgage \u2013 principal and interest \u2013 and has a remaining balance of $620,437.<\/p>\n<p style=\"text-align: justify;\">Now, let\u2019s say our borrower then renews into a five-year fixed-rate mortgage at 2.89%. Three years into that term, they\u2019ll have paid an additional $110,679, for a combined $205,673. The remaining mortgage balance will be $560,767.<\/p>\n<p style=\"text-align: justify;\">If our borrower had simply locked into a five-year fixed during that time frame at today\u2019s lowest rate, 4.64%, they would have paid a total of $217,548 and have a balance of $568,457. Going with a two-year term saves our borrower $11,875 and results in a balance that\u2019s $7,690 lower.<\/p>\n<p style=\"text-align: justify;\">Given this, the two-year fixed-rate mortgage provides the best of both worlds, offering borrowers the ability to adjust in the short term and peace of mind \u2013 a best-case scenario in today\u2019s uncertain economic times.<\/p>\n<p style=\"text-align: justify;\"><a href=\"https:\/\/www.biv.com\/news\/real-estate\/the-best-time-to-take-out-a-3-year-mortgage-was-a-year-ago-heres-how-times-have-changed-9244793\" target=\"_blank\" rel=\"noopener\">The Best Time to Take Out A 3-Year Mortgage was A Year Ago. Here&#8217;s How Times Have Changed<\/a> by Penelope Graham | The Glove and Mail | BIV<\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you\u2019re shopping for a new mortgage, or coming up for renewal, you likely wish you had a crystal ball. Picking the \u201cright\u201d mortgage rate is tricky at the best &hellip; [<a href=\"https:\/\/www.roryc.ca\/blog\/2024\/07\/shorter-mortgages-are-better-flexibility-is-the-name-of-the-game\/\">read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9,13],"tags":[],"class_list":["post-24348","post","type-post","status-publish","format-standard","hentry","category-mortgage","category-real-estate"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Shorter Mortgages are Better &amp; Flexibility is The Name of The Game &#8226; Rory C Real Estate | Oakwyn Realty<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.roryc.ca\/blog\/2024\/07\/shorter-mortgages-are-better-flexibility-is-the-name-of-the-game\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Shorter Mortgages are Better &amp; Flexibility is The Name of The Game &#8226; Rory C Real Estate | Oakwyn Realty\" \/>\n<meta name=\"twitter:description\" content=\"If you\u2019re shopping for a new mortgage, or coming up for renewal, you likely wish you had a crystal ball. 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