Monday, November 07, 2005

FAQ: Should I lock in my mortgage rate? Review of Short term or long term Mortgages

Question: I am not sure what I should do with the length of the term of my mortgage? Should I go long or short?
Answer: This is a question asked more than any other. Everyone wants a definitive answer to it. Of course, anyone that claims they can predict future interest rates is somewhat foolish or is making it up. I am neither ... so (as you already know my answer.) it depends. It depends on YOUR outlook for the future:

If you see a generally low inflation environment in the months ahead then you should stay as short of a term as you can, get the 6 month variable rate at 1.5%. You save a great deal on interest and the odds are with you (For if you locked in for five years at say 5.25%, the prime rate would have to rise to over 7.00% from the current 3.75% before you were to pay the same interest as a five year rate. This could be a huge savings to you over the long term.

If you are not sure whether inflation or deflation are coming in the months ahead, then you may wish to play it safe by getting a variable open maximum flexibility ... or analyze the TD product where you pay ¼% over prime but the maximum interest is capped at 6.25% or so for 5 years. Other banks offer some such product as well, such as the BOM which offers a 3.65% variable rate capped at 7.15% for 5 years or the long term/short term mortgage from Scotia bank.

If you believe inflation will be back then you may want to go long go for ten years ... Today’s best 10 year rate at about 6.75% is lower than the US - 15 year rate at 7.09% - and you can get out after 5 years (by law) with only a 3 months penalty. If rates go much higher (in an inflationary environment) or back to previous highs, the long term at this low rate will make your home attractive to future buyers.

You may see a graph showing the spread between short and long term mortgage interest rates and you will see that the wider the gap the greater the savings in going with a short term mortgage!

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