Homeowners locking in some of the lowest mortgage rates in history

Variable rate mortgages… move over. The longterm mortgage is back.

For the past few years, Canadian homeowners shrugged off their traditional preference for security and embraced the costsaving potential of variable or adjustablerate mortgages. With a varible rate mortage, the rate you pay is typically pegged to the bank’s prime rate – which has dropped steadily over the years and continues to stand at historic lows.

However, we’re seeing a turn of the tide now as Canadians conclude that longterm mortgages look very attractive again. For some, the longer the better. Let’s take a closer look at this change of heart.

The right mortgage, of course, always depends on other factors: including your personal financial situation and your risk tolerance. Your mortgage broker’s job is to help you find the best value while managing risk. While a longerterm mortgage offers the security of knowing exactly what your rate will be for the term chosen, it does carry the risk that – if rates go lower – you will wind up paying more interest than you would have with a variable or adjustable rate mortgage. A variable rate mortgage demonstrates its rewards in an environment in which rates are dropping, but carries the risk that – if rates begin to move upward, you may wish that you had “locked in” a longerterm rate. So both choices theoretically carry some risk.

Homeowners with variable or adjustablerate mortgages have done particularly well in the past few years – as rates dipped lower and lower. But because mortgage rates were on a downward trend for so long, it’s easy to forget some of the historical trends. Between 1976 and 1981, for example, interest rates went from a “low” in the 11% range to highs in the 21% range. That was a doubling of rates in a period of only five years. It might seem shocking, but those who locked in at 11% were actually the lucky ones.

It’s a sobering thought. Homeowners who witnessed the mortgage market in those years became a generation of riskaverse buyers, and the preference for fixedterm mortgages dominated their borrowing habits. Then as rates kept up a steady pace downward, the preference for longerterm mortgages faded. So why are they coming back in fashion?

While no one is predicting any 1981 scenario in mortgage rates in the next few years, you’re unlikely to find many experts who are predicting that rates will continue a long downward trend. And with uncertain downward room for rates, the socalled “risk” of the longterm mortgage is effectively eliminated. After all, you are unlikely to sign a 5 year mortgage today and then watch the rates drop 4% over that time.

Canadian homeowners have an historic opportunity to lock in some of the lowest rates in history. Some homeowners who locked in a very good rate a few years ago are even willing to pay an interest penalty to lock in a new longerterm mortgage at today’s rates.

There’s little guesswork today about whether rates will go lower; we’re talking maybe now about only fractions. So for very little risk (of lower rates), you can benefit from the traditional rewards of a longerterm mortgage: the security of knowing that – whatever happens to the rate environment – you can plan your payments until the end of your term.