Preference for Fixed Mortgages Rises to 74%

With interest rates at an all time low, the popularity of fixed mortgages continues to go up from 65% of mortgage holders to 74% over the last 2 years. This is according to The Canadian Housing Observer 2014 published by CMHC.

CMHC cites 2 reasons for this:

1. The small spread between fixed and variable rates, and

2. “Increased expectations” by consumers that mortgage rates will go up in the future; this in spite of the Bank of Canada reducing its overnight rate recently.

So Which Fixed Rate Mortgage is Better?

Lenders today offer 5-year, 7-year and 10-year fixed mortgages. Which to choose comes down to how risk averse you are.

So let’s look at the difference

Current interest rates are at an incredibly low level and how long this will last is a mystery. Let’s say that you want to determine whether to take out a 5-year fixed mortgage compared to a 7-year fixed or a 10-year fixed. At the time of writing this article the approximate discount mortgage rates, based on approved credit, are as follows:

5-Year Fixed
7-Year Fixed
10-Year Fixed
2.73%
3.44%
3.84%
What impact would these rates have on a $225,000 mortgage amortized over 25 years? With a 5-year fixed, no one knows what the rate to renew will be at the end of the 5 year term. Undoubtedly the 10-year termgives you the most stability. Here are the results at the end of each term: Results after a 5-Yr Term:
Mortgage Term
Current Rate
Interest
Paid

Monthly Payment
Balance Remaining
5-Yrs
2.73%
$28,343
$1,034
$191,310
On renewal, the remaining amortization is 20 years. Let’s say you renew for 2 years (for a total of 7) and assume rates have climbed to 4% or 5%. Here is how this compares to taking out a 7-yr mortgage today.
Term
Rate
Interest Paid
Monthly
Balance
7-Yr Mtg. Today
3.44%
$48,685
$1,116
$179,921
Renewal for 2 more years
4%
$43,032
$1,156
$178,256
Renewal for 2 more years
5%
$46,728
$1,257
$179,524
With the 7-Yr rate today, you’ll have paid more interest vs. renewing the 5-Yr term for 2 years at 4% or 5%. The principal balance remaining at 5% is comparable. What about renewing for an additional 5 years vs. a 10-Year mortgage today?
Term
Rate
Interest Paid
Monthly
Balance
10-Yr Today
3.84%
$74,120
$1,164
$159,427
Renewal for 5 more years
4%
$63,021
$1,156
$156,629
Renewal for 5 more years
5%
$71,973
$1,257
$159,511

Again interest paid on the 10-yr today term is greater. With the 5-year renewed for 5 more years at 5%, the interes paid is less than the 10-yr today and the balance is about the same; but what the future rate will be is pure guesswork.

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