Key points:
- If a recession hits in 2024, a 3 year fixed mortgage allows you to take advantage of lower rates 24 months sooner than a 5 year fixed product.
- The penalty to break a fixed rate is expensive, so a shorter term reduces the need to exit your contract early.
- A 3 year product strikes the right balance between short term and low rates.
Why opt for a 3 year fixed rate?
I was recently featured in an article by the Toronto Star about short term fixed rate mortgages. In this video, I discuss why a 3 year fixed rate is a good product for many borrowers today. I chat about how factors such as recession and mortgage penalties influence the current benefits of this product.
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:00] Earlier this week, I was featured in an article by the Toronto Star about short term fixed rate mortgages. And in this video I want to discuss with you three reasons why three year fixed rate mortgages make sense right now.
The benefits of a 3 year fixed rate
Chris: [00:00:16] Over the past 35 years, every period of high interest rates has been followed shortly thereafter by a meaningful drop to interest rates. The cause of that drop is recession, and we expect a recession to hit in 2024. By selecting a three year fixed rate mortgage versus a five year fixed rate mortgage, you have the opportunity to take advantage of lower interest rates 24 months sooner than if you opt for the five year fixed.
Chris: [00:00:46] The second reason is because breaking a fixed rate mortgage is very expensive. Banks and mortgage lenders have designed their products to have a penalty called the interest rate differential. And essentially what the interest rate differential does is that as interest rates fall, your penalty to exit the mortgage gets higher and higher and essentially discourages you from refinancing to pursue a lower interest rate because the penalty will be more expensive than the interest savings that you’ll realize by negotiating that lower interest rate.
Chris: [00:01:25] The third reason is because three year fixed rates occupy the “Goldilocks zone.” You may be asking, Well, by this logic, why don’t we opt for a one year fixed or a two year fixed instead? And the reason is because mortgage interest rates are priced relative to Canada government bonds. And at the moment, Canada government bonds are being expressed via an inverted yield curve. And what that means is that short term money is more expensive than long term money. And the reason for that is because we anticipate this recession to hit in the next 12 to 24 months. So for that reason, the three year fix occupies that sweet spot where we balance between short term and low interest rate.
Need more help or information?
Chris: [00:02:15] My name is Chris Molder. I am a Toronto mortgage broker. If you found any value in today’s video, I invite you to subscribe to my YouTube channel link below. And if you’d like to discuss if a three year fixed rate mortgage is right for you, I’m just a phone call or an email away. Till next time. Bye for now.
If you’d like to discuss your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.
