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Persistent Low Rates May Drive Short-Term Mortgages

rates-swapsYields on overnight index swaps (OIS) show that traders are betting more on a rate cut than a rate hike in the next year.

Take your pick of their reasons: modest inflation, risk from the European debt saga, Canadian mortgage rule impact, lacklustre North American growth, et cetera.

These and other factors are keeping a lid on rate expectations, despite Mark Carney’s intentional hints otherwise.

That’s got mortgage shoppers increasingly believing that rates will go sideways for the next 12+ months.

Of those borrowers who can stomach the risk, more might start seeking the lowest rate possible, regardless of term.

The variable-rate market is the typical place where people look for ultra-low rates. But you won’t find much value there currently.

A year ago, homeowners were getting prime – 0.90%. But those deals flew the coup last August and won’t be back for Lord knows how long. Today’s variables are in the prime – 0.25% range, which isn’t too hot.

Rates-on-MortgagesOne alternative, however, is the 1-year fixed. Right now you can find 1-year rates as low as 2.39%-2.49% from lenders like MCAP and RMG Mortgages. That’s the equivalent of prime – 0.61% or prime – 0.51%.

Regional credit unions also have some deals. If you live in Calgary, for example, First Calgary has led the market for months at 2.39%.

Folks who take 1-year mortgages have a bit more freedom than most. They can choose an entirely different term when they come up for renewal in 12 months. Many will choose to lock in for five or more years at that time.

There is risk, of course. Long-term rates could jump before you have a chance to lock in your renewal. But that risk is mitigated somewhat by the fact that you can secure renewal rates 90-180 days in advance, depending on the lender.

If you’re willing to trade renewal flexibility for a longer-term, 2- and 3-year terms can now be found at 2.49% and 2.69% respectively.

Just keep in mind that a 2- or 3-year term may put your renewal right in the midst of 2014/2015 rate hikes (if you give credence to economic forecasts). In addition, 2- and 3-year discounts are arguably inadequate when compared to the rate protection of a 2.99% five-year fixed.

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When evaluating shorter terms, consider whether:

  1. Your personal “balance sheet” can withstand higher mortgage payments if rates rise unexpectedly
  2. You’re willing to make higher-than-necessary payments (equivalent to at least a 5-year fixed payment) to accelerate principal paydown
  3. You’ll need to refinance or move in the next few years
  4. The trade-off between short-term interest savings and long-term rate assurance is worth it.

And, while you’re at it, some free personalized advice can’t hurt. Find an experienced mortgage professional who can run some interest rate simulations and worst-case scenarios, and be sure you’re comfortable with the results.


Rob McLister, CMT