The two- or three-year mortgage allows for regular payments and can be rolled over to a lower rate (variable or otherwise) at the time of renewal. (Photo: 123RF)
GUEST BLOG. The market is becoming more and more demanding for new buyers when it comes to getting a mortgage. That said, interest rates fluctuate and in a few years it is likely that they will stabilize again after this unexpected increase.
How can customers stay aware? By getting a two- or three-year mortgage. In fact, it is currently becoming the most popular option with buyers. The two- or three-year mortgage allows for regular payments and can be rolled over to a lower rate (variable or otherwise) at the time of renewal.
Why a short-term fixed interest rate?
In Canada, the most common mortgage term is five years. However, there has been a shift to two- or three-year fixed loans in recent months.
This trend is due to several reasons. First, mortgage rates have peaked since January 2009. This means that buyers are deciding to bear the burden of high interest rates now in order to get a better rate at a renewal time that comes sooner (three years vs. years).
Many homeowners are also more comfortable with regular monthly payments with a fixed rate versus a variable rate. As a result, we are now seeing more and more buyers opting for a three-year fixed rate mortgage.
People are right to prefer a fixed but short-term mortgage rate. Why? Interest rates have risen, and this scenario gives them the best of both worlds: the ability to make regular monthly mortgage payments, albeit at a higher amount, with the option to renew at a lower rate two or three years later.
In response to this shift in preference, a few tips apply to potential home buyers.
First of all, you need to take into account the options of prepayment to pay less interest. This is an important asset to guarantee lower borrowing costs, regardless of the duration or type of loan.
So you have to know that although we hope that the rates will fall after two or three years, it is difficult to predict exactly how the economy will fare over time. We must therefore consult a professional to lay out a strategy at the time of the renewal.
It is also important to have your goals in mind. If lower payments are the buyer’s primary goal, a short-term mortgage is a good idea. If the goal is to pay off the mortgage as quickly as possible, adding prepayments is a good option. A well-planned strategy is necessary to ensure the best results.
Please note: the above are my personal opinions and experiences and not the position of nesto inc. I am not an authorized mortgage lender or mortgage broker.