How to Get Today’s Historic Low Mortgage Rates for the Next 8 Years
Updated: Oct 8, 2020
Mortgage rates are at historic lows. What's the best way to capitalize on this, for as long as possible?
To some people a 10 year fixed rate might seem like the obvious choice, but that's not what I'd suggest. Sure, you could lock in for the next decade, but you probably shouldn’t because of:
Higher rates. Lenders charge a premium for longer terms, which defeats the purpose.
Massive penalties. This could wipe out any low rate savings if you make changes to your mortgage. Which is highly likely, since your life wasn’t the same 10 years ago (hello, covid) and it won’t be the same 10 years from now.
There is another solution. Here’s how you could get today’s low rates for as long as possible - up to 8 years.
Go variable. The Bank of Canada has pledged to keep rates low, so your payments should also stay low for the next 2-3 years.
Most variable terms are for 5 years with no cost to convert. This lets you lock into a fixed term before rates go up, without a penalty.
Fixed rates are projected to rise 2-4 years from now. Until then they could drop even more. Use this strategy and you could get 8 years at ~2%.
Here’s what that would look like:
That’s why going variable today could work out better than fixed in the long run.
Some recent historical context
After the 2008/2009 credit crisis, interest rates bottomed out, until 2014 when they entered the 3%+ range. Rates were down again in 2016, then firmly back up over 3% from 2018 until the pandemic hit.
Recent trends suggest the markets are comfortable with 5 year fixed rates being over 3%. Economists now think we won't see this again for several years.
Will history repeat itself? A decade ago, savvy borrowers had rates that were sub 2%, and here we are again. The reasons are different but the numbers are the same.
AAA clients buying urban homes have the most bargaining power, but almost anyone can use the strategy outlined above. Even if you're already locked in (ask me how).
Risk and rate
It’s not all about rate. You also have to consider the risk - but not in the way you think. Most people hear “variable” and think “risky” when they should be thinking “flexible”.
The pandemic is only a few months old. If there’s even a remote possibility you might want to change jobs or schools, or sell or relocate in the next 5 years, going fixed now could be a mistake. It's not uncommon for fixed penalties to be in the five figures. With variable, most are capped at 3 months' interest.
Look at it this way. What’s less risky - cementing the next 5 years? Or keeping your options open? Variable means you can lock in when it makes the most sense.
Don’t take this advice
Reading one blog post isn’t a great way to make mortgage decisions. Talk to a professional about what’s best for you.
Share this article with a friend who would like today's historic low mortgage rates for 8 years. Thanks for reading!