Dear Money Lady,
I have to renew my fixed rate mortgage into a rate that is now four per cent higher, and I was not sure what term to choose. What should I do? Thanks, Jenn
Great question. Now is the time to lock up a mortgage renewal into a shorter term to ride things out.
I was driving back from Toronto last week and I was flipping through all the radio channels, and I came across this guy spouting off mortgage advice to listeners that was so blatantly wrong I started screaming at the radio. What really got me crazy was that he said to beat the rates all you had to do is take a longer fixed rate term like a seven- or 10-year mortgage to get a lower rate, and then when the rates dropped, just move into a shorter term at that lower rate. Wrong. Does he really think that can happen?
If you lock into a seven-year rate and then in a year from now you want to break it and go into a two- or three-year rate because the interest rates are lower, well, that’s going to cost you big time. The banks are in the business to make money, not lose it. Once you lock into a fixed rate mortgage there will be a penalty to break it. Canadian banks calculate penalties for fixed mortgages based on rate differential, which means they look at the current rates, the rate you locked in at, what discount they gave you at the time and then how much interest they will lose by breaking it. Anyone that has had to break a fixed rate mortgage in the past knows more than the mortgage broker on the radio telling everyone to call him for more details.
Let’s face it, we all overspent when the access to cheap money was easy, and for most Canadians the qualification for a mortgage renewal must now be about affordability and not just the interest rate. Economists predict interest rates will drop once inflation hits the target rate of two per cent and we really are not that far off, with inflation at 2.8 per cent (June 2023). Even if we do hit the two per cent target, in my opinion, rates will not drop as quickly as we would all like. It’s going to be a slow decline till interest rates level out around three to five per cent.
Jenn, why not consider a short-term fixed mortgage (two or three years) to ensure you have one less thing to worry about. Grocery prices are up, gas prices are up and life is expensive. We need to give it time for this economic correction to happen. Economists predict we will not see a significant rate decline until after the U.S. and Canadian elections in 2024.
Written by Christine Ibbotson, author, finance writer, national radio host, and now on CTV Morning Live, and CTV News @6 sponsored by East Coast Credit Union. Send your money questions (answered free) through her website at askthemoneylady.ca.