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Tuesday, August 30th, 2016

One Year Fixed Rate Mortgage – Low Rate Mortage

Low Mortgage Rates on your Mind? Consider the One-Year Fixed Rate Mortgage

In recent years we’ve heard quite a bit of talk from economists, banks and even Mr. Flaherty himself about the direction of mortgage rates; we were told they could only go up. But contrary to what market pundits were saying, mortgage rates fell even further. The obvious question for potential borrowers has now become, “should I lock in a long-term mortgage?”

It could make a lot of sense if you need rate security.

On the other hand, the often overlooked one-year fixed rate could be exactly what you’re looking for. Although only one in 16 parties opt for such a term when choosing a mortgage, the one-year fixed rate has essentially become the new variable-rate. The one-year fixed rate is currently sitting at 2.39%, equal to the prime rate less 0.61%. Historically, rates at this level for variable rates would have been deemed low mortgage rates.

An advantage is that as rates rise (assuming they do) the one-year rate turns over more slowly than a comparable variable rate, and therefore costs less. In an environment of declining rates, the opposite would also be true.

Studies have shown that the one-year fixed rate and variable rate to have a 93% correlation with each other.  This is to say that, when there are one-year fixed low mortgage rates, there are also typically low rates for variable mortgages; they move up and down together. Both the variable rate and the fixed rate are influenced by rates set by the Bank of Canada.

Another advantage of the one-year fixed rate is that renewal rates can sometimes be locked in for up to 6 months in advance. Some options will even let you convert to a five-year fixed rate without a penalty. On the downside, you won’t receive the best low mortgage rates in the market on longer terms that you convert to.

A additional advantage of the one-year term is that you will find it easier to avoid fees that often come attached to variable rates. If you would like to make a lump sum payment or renew, you won’t have to wait nearly as long to avoid a penalty.

But before we get too caught up in the benefits of the one-year fixed mortgage, consider what will happen if rates rise and your mortgage renews at the higher rate.  For every $100,000 in your mortgage and a 1% rate increase, you’ll end up paying approximately $50 more each month.

There is also an element of re-qualification risk to be considered. If your personal environment changes for the worse, your finances go downhill, your company downsizes and you lose your job, or mortgage rules change (as they often do), it may be difficult to get re-approved or to switch lenders.

One-year fixed rates are also more difficult to qualify for. Lenders  want to make sure that you can afford higher payments in the event that low mortgage rates turn into quite the opposite.

One-year mortgages are best suited for risk-averse borrowers and those who only need a mortgage for a short period of time. For parties in this situation, one year mortgage rates may continue being a solid option.


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