If you want a variable-rate mortgage (and are suited to one), take a peek at a one-year instead.
Here are nine good reasons why:
- Although they’ve been improving, today’s variable-rate mortgages still have abnormally high interest rate premiums (averaging prime + 0.40% today, versus prime – 0.75% a year ago).
- A 1-year mortgage doesn’t lock you into a rate for 3-5 years. That means you can refinance in 12 months when (hopefully) discounts to prime might be back.
- The rates are comparable. Variable and 1-year mortgages are both based on short-term interest rates, so they move together over time. If you assume a 0.75% discount off of posted rates, 1-year fixed mortgages have actually been cheaper than prime over the last 10 years. The chart below shows the posted 1-year rate (the upper line). Discounted 1-year rates are obviously lower.
- In certain cases, rates on 1-year mortgages are better than today’s best variable rates.
- The most flexible 1-year mortgages are convertible into a fixed OR variable rate at any time, and at no cost.
- 1-years give you a chance to haggle with your lender again in 12 months. (Some people feel they get a better deal this way.)
- If rates go up in the next 12 months, you’re protected for the remainder of the term in a fixed-rate mortgage.
- If rates steadily climb over the course of five years, 1-year terms could help you come out further ahead. That’s because 1-year rates reset slower than variable rates—which is helpful when rates are rising.
- 1-year payments are fixed for a longer period of time than variable payments. That helps you budget a little easier. (The exceptions are the minority of variable-rate products with fixed payments.)
Besides a good 1-year fixed, consider a 2-year term as well. The rates are not that far behind. For a meagre ~0.20% extra, you’ll get one additional year of rate protection.
______________________________________________________
Legalese: One-year terms are not suitable for everyone. The above reflects opinions and not a recommendation. Consult a licensed mortgage planner for details.
Visited 4 times, 1 visit(s) today
Last modified: April 28, 2014
Are rates for 1-year mortgages likely to be higher because the lender has to do all the work only to do it again the next year (unless someone else has a lower rate)? Open mortgages seem to be a lot more expensive than closed terms – it seems like 1-years would be pretty similar.
Hi SP,
Thanks for the question.
Yes, some lenders do build in rate premiums for this reason.
Fortunately, we operate in a very competitive market. In some cases, other lenders are offering 1-year rates well below typical variable rates. Lenders also price in the fact that most will renew with them on maturity (90% do according to CMHC–a crazy number).
On the other hand, if variables were around prime – 0.50% right now, our tune might change.
Have a great weekend,
-rob
The most flexible 1-year mortgages are convertible into a fixed OR variable rate at any time, and at no cost.
quite a few banks only allow the conversion to be done 3 months prior to maturity. which bank allow the conversion into a Variable product?
Hi BBB,
It is FirstLine’s Auto-12 product that allows this.
Cheers,
-rob
Thanks for the information – with the limited comparison shopping at renewal it’s true that banks can expect to get a lot more than one year from the average customer.