Mortgage rates have been all pleasure and no pain for an oddly long time.
Take five-year fixed rates. They've drifted lower for more than a year and a half with no significant upturns along the way.
Variable rates have coasted lower for even longer – three years without a rebound. To find a similar phenomenon, you'd have to go back four decades. It's hard to overemphasize how unusual today's rates are historically. The low-growth, low-inflation environment gives markets no reason to demand higher interest. That's why, despite 51 per cent of Canadians choosing a five-year fixed rate, you need to at least consider variable and shorter fixed terms – if you're well qualified. In that spirit, here are two terms that present solid value in today's market, and two that don't.
The Stars
The one-year fixed: Shop around and you'll find one-year mortgages under 2 per cent. That's actually lower than most variable rates. The benefit of a short-term mortgage is that it renews more often, improving your odds of exiting the mortgage without a penalty. That's valuable if you want to sell your property, refinance it, lock in to a longer term or renew at the lowest available rates. Something to keep in mind is that one-year terms are most economical if you need a mortgage for a purchase or refinance. That's because if you're merely switching lenders with no other changes to the mortgage, most lenders don't pay your switching costs – such as legal and appraisal fees – for terms less than three years.
Best one-year fixed rates: 1.99 per cent to 2.29 per cent. Where to find a good one-year rate: CIBC and mortgage brokers, through lenders such as First National Financial.
The three-year variable: Less than 6 per cent of Canadians choose variable terms shorter than five years. Many hesitate to even consider a shorter-term variable mortgage, for fear that it's somehow riskier. It's actually the opposite. Three-year variables are usually less risky because you can renegotiate sooner without a penalty. That's meaningful since the average five-year mortgage lasts only about 3.5 years. If you do have to pay a penalty on a short-term variable, it's only three-months' interest.
The biggest knock on three-year variables is the risk of variable-rate discounts shrinking by the time people renew in three years.
But even if they do, you can always move into a low-cost one– or two-year fixed at the time.
Best three-year variable rates: 2.05 per cent to 2.20 per cent. Where to get a good three-year variable rate: Mortgage brokers, through lenders such as Canadiana Financial, Merix Financial and ICICI Bank.
The Dogs
The four-year fixed: The shorter your term, the lower the rate. That's generally how it works. But these days, most four-year terms are actually priced higher than five-year terms. If rates jump even one percentage point by renewal time in four years, the higher rates in year five could cost you a few grand on a $250,000 mortgage.
If you don't like risk and you're sure you'll need a mortgage for more than four years, get a five-year fixed.
Best four-year fixed rates: 2.39 per cent to 2.54 per cent.
The 10-year fixed: Perennially on the dog list, the decade mortgage is like exercise equipment you don't use. It sounded good at the time, until you realize you overpaid for it. Ten-year rates have been this year's biggest disappointment. While interest costs dropped across the board after the Bank of Canada's January cut, most 10-year rates remains stubbornly high. Taking a 10-year over a five-year means you'll fork out roughly $5,400 more for every $100,000 of mortgage in the first five years.
Best 10-year fixed rates: 3.49 per cent to 3.79 per cent.
Robert McLister is a mortgage planner at intelliMortgage and founder of RateSpy.com. You can follow him on Twitter at @RateSpy
Robert McLister