As we’re all aware, the interest rates have been quite the topic of conversation over the past year. Should you go fixed? Variable? 5 year fixed? There are so many options, it’s hard to understand your best bet.
In this article, I’ll share why I’m not recommending a 5 year fixed mortgage term to clients and what I’m suggesting instead.
Why you shouldn’t do a 5 year fixed.
Let’s just get down to business here, if your mortgage broker is suggesting that you do a 5 year fixed mortgage right now, question why it makes sense for your situation while noting that brokers do get paid more for longer terms.
We are seeing higher interest rates right now, but also the positive outlook that those rates will soon be (hopefully) coming down.
If you choose to go with a five year fixed mortgage right now, you are locking yourself into that interest rate for five years. This means that when the rates go down, you will continue to have to pay the higher interest rate until your mortgage term is up.
But, you want the lower rate?
Say you’ve locked into your mortgage rate and now the rates have gone down. You’re probably going to be wanting that lower rate for your mortgage instead of the one you’re paying.
If this is something you want to look into, it will cost you to break your 5 year term. And, it won’t be cheap.
This would be the interest rate differential, or at least a penalty of 3 months interest. The penalty depends on how long you have left on your mortgage term, the current rates and the lender you are with.
It will really depend on your situation and your term whether it makes sense to break your term for a lower interest rate or to wait it out. This unknown is one of the biggest reasons I’m recommending that people don’t sign a 5 year fixed mortgage term right now.
What I recommend instead.
Instead of going with a five year fixed rate, here’s what I’m suggesting for clients instead.
I am still suggesting a fixed mortgage rate because variable rates are quite a bit higher than the current fixed rates and there’s no telling when that will come down.
So, for a fixed rate, I am suggesting anywhere between 1-3 year terms depending on the client’s situation.
The term can go higher than 3 years, but it all depends on the specific situation and need for the mortgage.
Why a 1-3 year fixed?
Instead of locking in a 5 year fixed rate, I’m suggesting a 1-3 year fixed rate instead because that provides clients with the potential to get a lower interest rate sooner. Once the shorter term is up, we can come back together and look at where interest rates are and decide your next mortgage term.
That could be another 1-3 year fixed term, or could even be a 5 year term depending on where rates are at.
A 1-3 year term provides you with a lot more options for the future of your mortgage. And, I for one, know that people want options when it comes to mortgages.
Let’s work on your situation together.
The first step in figuring out which mortgage term is best for your situation is by speaking with me today. We can go through your financials, history and wants in a mortgage. I’ll work on getting you approved and then we can decide together what your best mortgage option is. I will go through all of the options and let you know my thoughts when it comes to each one. I want to empower my clients when it comes to mortgages and understanding what they’re signing.
If you’ve been told to do a 5 year fixed, please reach out to me and let me show you your other options. Give me a call at 250-826-3111, apply on my website or reach out to me through my website. I look forward to chatting with you soon!