The Five Year Fixed Mortgage "TRAP"

For years Canadian homebuyers have been advised by lenders to choose a five-year fixed mortgage term, and that advice came with little or no explanation. It definitely didn't come with any insight into what the rates would or could be at time of renewal in 5 years...and even more likely "no explanation of the difference between intere rate vs. total interest paid for a property". 

According to a recent Nielsen Consumer Insights survey of 1,005 Canadians, between February 6-10, 48 per cent of Canadians would choose a fixed rate mortgage, compared to 31 per cent who would choose variable if they had to make the decision today. 

 Simply stated, they have fallen into what we consider to be the "Five Year Fixed, Mortgage Trap".  
Let us explain what we mean - A five-year fixed term has consistently been the lenders most profitable mortgage product, yet historically has not proven to save the consumer more money. 

The fixed mortgage challenge is not the interest rate itself, but the risk of being "trapped" in an unwanted mortgage in the event that the borrower would like to make changes in that mortgage or renew the mortgage at a more advantageous rate before renewal, without incurring unexpected penalties and fees. 

The average Canadian will need 18 years to pay off their mortgage and a solid "Mortgage Plan" or "Mortgage Strategy" needs to be designed to encompass that time frame. 

Think of your mortgage in the same terms as your investments or retirement savings strategy. It is imperative to plan over the long term, (not just the next 5 years), in order to realize any significant financial gain. The benefit of the variable rate mortgage (VRM) is that the borrower is not "trapped" in a mortgage and can make changes to their mortgage term at any given time. The key is that unlike a fixed rate mortgage, where early termination or adjustments can result in significant penalties, a VRM is not burdened with the same penalties or hidden fees.  

This past week the Bank of Canada announced that our economy was not growing as much as expected and therefore they see no need to change the prime interest rate anytime soon. That's not great news for our economy, but it is good news for variable rate mortgages. Please don't make the mistake of associating a variable mortgage with a rate that bounces around throughout the year and that you have to monitor closely and constantly. The fact is that the variable rate mortgage has not experienced a rate change in four years! Like a mutual fund, the variable rate is predicated on allowing natural rate fluctuations to occur (typically rising and falling by .25% only a couple times throughout the year) - and as long as they stay within a reasonable band we just leave it alone. 

The result is that the accumulation of these minor changes in the prime rate will outperform the fixed rate alternatives - resulting in the paying less interest over the long term. The big bonus is that by not being trapped, if for some unforeseen reason there is financial crisis or a substantially better interest rate opportunity; we have the flexibility to change our variable mortgage early to another preferred mortgage term without penalties or hidden fees. It is all about having the ability to make choices and decisions based on fact.
Our commitment is to your financial literacy. There is no a right or wrong mortgage, but by working together our mutual goal is to make an educated choice. Let's not leave our financial decisions up to a Bank - let's connect and explore how, by working smarter and with the right information, you can save more money and pay less in mortgage interest!

Anytime, Peter & Andre

*On a personal note: Just recently I was watching TV with my family and saw a commercial that had a great line in it, "Just Breathe". 

Take this moment to pause and do yourself and your family a favour. Take the time to take a deep breath. Take the time to look around you.  I couldn't help but think of Jim Flaherty who, whether you liked his politics or not, was a dedicated, patriotic and hard working Canadian, who passed away just weeks after retiring...we can learn a lot from his work ethic, his patriotism and his untimely passing...if we all just take the time to stop...and simply... "Just Breathe".

                                                            Peter Majthenyi, AMP                                                           

Broker, Mortgage Planner

                              Andre Semeniuk, AMP                                    

Agent, Mortgage Planner

 Mortgage Architects Brokerage #10287

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Stefania Patraulea

Stefania Patraulea

Sales Representative
CENTURY 21 Leading Edge Realty Inc., Brokerage*
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