What term to select?

May 7, 2024 | Posted by: Sherry Corbitt

The most common question I am asked these days: Should I take a Three-Year or Five-Year Term?  

In this rate environment, this is indeed a hard decision. The 5-year fixed rate will be lower rate, but 5 years seems like a long time to lock into when all signs are indicating a decrease will happen in the future. The 3-year term is a bit higher of a rate and you are betting on the rates being substantially lower come renewal in 2027 vs 2029 (3-year vs 5-year renewal dates).

Looking back a year ago, the 5-year fixed rates were in the low 6% range and today they are in the mid-5% range (these are refinance rates, not purchase rates -that is a completely different topic indeed!). With an approximate .50-70% difference over the course of the  past year. Where will we be next year? The Magic 8 Ball says ‘uncertain’ but I believe if we stay the course we are predicting it will be about -.75% lower than today.

There are other terms outside of the 3- or 5-year discussion, such as the variable term or a shorter-term like a 1 or 2-year term. These rates are in the mid 6% to low 7% range and not a popular option now. I am happy to discuss with you though so we can make sure what we plan for your renewal makes the most sense.

Let’s look at a standard refinance of $400,000 on a 30-year amortization and what today’s rates look like (based on Scotia’s rates as of May 8th, 2024, and for illustration purposes only – rates rounded down to nearest dollar). What would a biweekly accelerated payment be?

5-year fixed: $1120 payment

3-year fixed: $1132 payment

2-year fixed: $1251 payment

1-year fixed: $1322 payment

Variable (Prime rate of 7.20% -.30%): $1304 payment

 

When deciding on what to do with your upcoming mortgage renewal, here are a few options to consider:

  • If you are thinking fixed, then a shorter term, such as three years may suit you best. This will give time to time and allow you to sit with this mortgage for three years and hopefully come out on the other end. You do need to know that the three-year term is often a higher rate than the five-year fixed term. If qualifying is an issue, then this may not work. This is where we come in to work on strategy with you.
  • If you are open to a variable term, there is much argument for the fact that now is the time to take a variable rate and ride the rate wave down. This is a great option, but you have to be comfortable with the unpredictability of it. You could be at the current prime (7.2%), a little longer than expected. Of course, remember that a variable rate is usually prime – %. For example, today, that could be prime -.95% = 6.25%. For those of you focused on payment, this may not help you as the payment on a variable will be higher than the payment on a three or five-year term. 
  • When in doubt of which term to take, lets really take a serious look at your budget and monthly cash flow. Like is expensive and focusing on the payment you can afford vs the term , can help make the most comfortable choice for you. You don’t have to be in love with the rate…you just need to ride these higher rate waves until situations change. Sometimes, the best decision comes down to what can you afford.

I am your Mortgage Broker for Life – so reach out and let’s discuss. My advice is always free, and I’d love to hear from you.

Sherry Corbitt

sherry@sherrycorbitt.ca

905-995-3143

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