About a year ago I said the following: “The Bank of Montreal is now offering the ridiculously low rate of 2.99%”. Well that was a year ago and things haven’t changed much – except that rates have gotten even more ridiculously low. BMO, Bank of Montreal’s Andrew Gibson is offering a five year fixed rate special of 2.74%. Rod MacInnis at The Mortgage Centre tell me his best 5 year rate is 2.54%.
Ten year rates are as follows: Rod MacInnis – 3.84% and Andrew Gibson is offering 3.49%. If you’re wondering why the 10 year rate is so much higher, the answer is simple; the banks are betting that rates will go up substantially sometime in the next ten years.
Here is the case for getting a mortgage at the higher 10 year rate. Assuming that the economy improves in the coming years – and that’s what the banks are betting on – it’s a pretty safe bet that rates will eventually rise. If you go that route, you will know your monthly payments are fixed for the next ten years, even if rates get ridiculously high. I’m old enough to remember when we had 18% fixed rates.
What if I want to buy up or sell before my rate term is up? First, if you sell and buy another home and rates have gone up, you should be able move your mortgage to the new property. If you are moving up and paying more, the bank should “blend” your mortgage. That means they will calculate your new rate based on what’s left of the original 10 year mortgage and any additional money you borrow at the prevailing rate. Before signing, read the mortgage papers carefully, making sure that your mortgage is portable and that there is a provision to blend two rates if you want to increase the principal.
Secondly, make sure you understand what “payout penalties” are proscribed in the mortgage documents. Usually, if you want to pay out your mortgage before the term is up you will have to compensate the bank for the privilege of cancelling your mortgage. Depending on how much is left on your mortgage and the prevailing interest rate at the time, you may have to pay anything from a couple of hundred dollars to several thousand dollars. Hence, read carefully and ask questions before signing on the dotted.
Finally, you could always get an open, variable rate mortgage (VRM). Basically, that means that your mortgage rate will change as the prevailing rate changes. As long as it is an open mortgage, you can lock into a fixed rate mortgage at any time – or cancel it and move to another bank without paying a penalty. That way you could enjoy the generally lower VRM rate and lock into a fixed rate mortgage if it looks like rates are on the way up.
Most people choose the 5 year fixed rate option, but as long as you are willing to watch the mortgage market and read all the mortgage documents before signing, there may be an advantage to being a bit creative in your home financing.
For more information you can contact Andrew Gibson at 902 430-7192 or [email protected] or Rod MacInnis at 902 422-6707 or [email protected]