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The most difficult question facing a potential mortgage borrower is, "Do I go long term or short term?" Everyone has a theory on where rates are going to go. Everyone has a theory on what you should do. The problem is, no one can agree! I'm sure you've all heard the theories about interest rate fluctuations. "Rates will stay low until after the American election, and then they will go sky high." "Rates will be stable until after the next federal budget, and then they will go up." Rates can't go up, our rate of inflation is under 2%." All very good theories. All based on historic fact. And history does repeat itself, in the long term. How long is long term? Five years, ten years, fifteen years? The graph at the bottom of our Rates Page shows the five year mortgage rates recorded every January since 1951. A few things are obvious. Rates are the same as they were over 40 years ago.! While there appears to be a cycle of rises and falls, they are not really consistent. The peaks in 1982 and 1995 happened very quickly. The rise in 1990 was much more gradual. With the exception of 1989, 1 year rates appear to be lower than 5 year rates, although the spread between the two is not consistent either. The gap appears to be as big in 1997 as at any time during the previous fifteen years. So what should YOU do? The theory goes, if you continually take one year mortgages and renew every year, you will come out ahead in the long run. Is that true? Take a look at any five year period on the graph. It all depends when you start your five year period, as to how you will do over the whole period. Some people like the stability of a longer term mortgage. They are prepared to sacrifice a little bit on the rate, knowing that their payments will be consistent during the full five year term. That is the rationale behind the government's ruling that first time homebuyers must now take a minimum three year term mortgage. But, are you really buying peace of mind? Rates today are as low as they have ever been. Why not lock in long term now, they can only go up. But there are economists who say rates will not rise significantly before the year 2000. (Again, we ask for a definition of "significantly"). There are mortgage products on the market today that take advantage of the low interest rates for short term mortgages, combined with the security of a five year mortgage. There are other mortgages available with variable term options. Which one is right for you? That depends on your own individual circumstances, and where you see interest rates, the economy, and your job stability over the next few years. Confused? Don't be. There is no right answer. Only personal choice. Ask your mortgage professional to show you the various options available and help you choose the mortgage that is best for your needs. This article produced for CIR by KITNewsletter
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