Mortgage General

Are Short-Term Fixed-Rate Mortgages the Right Choice for Your Home Loan?

By July 7, 2023 No Comments
Are Short-Term Fixed-Rate Mortgages the Right Choice for Your Home Loan
Are Short-Term Fixed-Rate Mortgages the Right Choice for Your Home Loan

Over the past year, mortgage rates have experienced a steady increase due to the rapid rate hiking cycle implemented by the Bank of Canada.

This cycle has resulted in a significant rise in the benchmark cost of borrowing, soaring from 0.25% during the pandemic to the current rate of 4.75%. In Canada, the Prime rate used by lenders to determine variable mortgage rate pricing has also climbed to 6.95%.

Consequently, variable mortgage rates are less appealing, with the lowest five-year offering at 5.8%. Unfortunately, fixed mortgage rate options haven’t offered much relief either, as bond yields have surged in recent months. Presently, the lowest five-year fixed rate available in Canada is 4.89%.

Nevertheless, there are indications that lower rates could be on the horizon if the economy softens and inflation remains subdued. Some analysts even anticipate the possibility of the Bank of Canada commencing rate cuts by the second half of 2024, contingent on the manifestation of recession indicators.

What is a short-term fixed-rate mortgage?

A short-term fixed-rate mortgage is a type of home loan that offers borrowers a fixed interest rate and a shorter repayment term compared to traditional mortgages. Unlike adjustable-rate mortgages, where the interest rate can fluctuate over time, a short-term fixed-rate mortgage provides borrowers with the security of knowing their interest rate will remain constant for the duration of the loan.

Why would I want a short-term fixed-rate mortgage?

Opting for a short-term fixed-rate mortgage can offer several advantages depending on your financial goals and circumstances. Here are some reasons why you might consider this type of mortgage:

  • Interest savings: Short-term fixed-rate mortgages typically have lower interest rates compared to long-term mortgages. By choosing a shorter term, you can save a significant amount of money in interest payments over the life of the loan. This is especially beneficial if you have the financial capacity to make higher monthly payments.
  • Debt-free homeownership: With a shorter repayment term, you can pay off your mortgage debt faster. This means you’ll be able to own your home outright in a shorter period of time. If your goal is to achieve debt-free homeownership and enjoy financial freedom sooner, a short-term fixed-rate mortgage can help you achieve that.
  • Equity building: By making higher monthly payments, you’ll build equity in your home at a faster pace. Equity represents the portion of your property’s value that you own outright. This can be advantageous if you plan to leverage your home equity in the future for other financial needs, such as home renovations or investments.
  • Lower overall cost: Shorter mortgage terms mean you’ll have fewer years to pay interest on your loan. As a result, the overall cost of your mortgage will be lower compared to a longer-term mortgage. This can save you a substantial amount of money and allow you to allocate those savings toward other financial goals.
  • Rate protection: Opting for a fixed-rate mortgage provides protection against potential interest rate increases. If interest rates rise during your short-term mortgage, your rate remains unchanged, providing you with stability and predictability in your monthly payments. This can be especially beneficial if you prefer to have a clear understanding of your mortgage costs throughout the term.
NOTE: It’s important to note that choosing a short-term fixed-rate mortgage should align with your financial situation, including your income, cash flow, and future plans. It’s advisable to consult with a mortgage professional or financial advisor who can evaluate your specific circumstances and help you determine the best mortgage option for your needs.

Key differences between short-term fixed rates and short-term variable rates

When it comes to short-term borrowing or lending, there are two common options available: short-term fixed rates and short-term variable rates. These two options differ in several key aspects, and understanding their differences is crucial for making informed financial decisions. The key differences between short-term fixed rates and short-term variable rates can be summarized as follows:

Stability: Short-term fixed rates provide stability by maintaining a constant interest rate throughout the agreed-upon term. In contrast, short-term variable rates are subject to change, reflecting shifts in the benchmark or index.

Predictability: Fixed rates offer predictability, as borrowers or lenders can accurately calculate the interest expenses or earnings over the entire term. Variable rates, however, introduce uncertainty, making it challenging to forecast future costs or returns accurately.

Reaction to market conditions: Fixed rates are immune to changes in the market or economic fluctuations, providing insulation from potential rate increases. Variable rates, in contrast, respond to market conditions, which can be advantageous if rates decrease but detrimental if rates rise.

Flexibility: Variable rates may provide more flexibility, as they can align with market changes. If interest rates decline, borrowers or lenders may benefit from reduced costs or increased returns. However, if rates increase, the opposite effect occurs. Fixed rates lack this flexibility, maintaining a constant rate regardless of market movements.

The Bottom Line

A short-term fixed-rate mortgage can save you money through lower interest payments, reduced total interest costs, faster equity building, and the potential for lower overall borrowing costs. If you prefer to minimize risk and are concerned about the current trend of increasing interest rates, opting for a 5-year fixed-rate mortgage is advisable. Imagine the peace of mind that comes with having a team of mortgage professionals by your side. At Pegasus, we’re here to provide personalized advice based on your specific circumstances and ensure you make the best-informed decision. Don’t let uncertainty take over – contact us immediately, and let us show you how we can help you with all your mortgage needs.

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