The art of choosing wisely

Residential


Are you on the brink of renegotiating your mortgage interest rate? The question on everyone's mind is, "What rate is right?"


With fluctuating interest rates and an array of fixed-rate options, making the right choice can be a bit of a puzzle. Should you go for a 12-month, 18-month, two-year, or three-year fixed rate? Or should you play it safe and secure a five-year rate? We look at different strategies people employ to pick their mortgage interest rate.


The lowest rate isn't always the best.

It's tempting to chase after the lowest interest rate available today, which often appears to be the five-year rate. However, this approach may not serve you well in the long run.

What if interest rates decrease over the next few years? Your best bet is to aim for the lowest average interest rate over the duration of your mortgage.

If you anticipate that interest rates will rise in the coming years, leaning towards a longer-term fixed rate (three, four, or five years) might be prudent. This shields you from potential increases.

Conversely, if you foresee rates dropping and have a fixed rate renewal on the horizon, opting for a shorter-term lock-in can help you benefit from lower rates.

And if you believe interest rates will remain steady, you may simply go for the lowest rate available. But there's another factor to consider: peace of mind.


Certainty in an uncertain world.

Having a clear picture of future repayments can be comforting for those with substantial mortgages. Many homeowners opt for the five-year interest rate despite it only sometimes being the most cost-effective option. The five-year rate provides stability and certainty in a world full of uncertainties.


Now, let's explore three strategies to help you decide which interest rate could be right for you:


1. Strategy One: Blindly lock in the one-year rate

Historically, the one-year rate has averaged the lowest. It may seem counterintuitive, but even if you chose to lock in for one year yearly over the last two decades, you'd likely have a lower average interest rate than other options. On average, you would have saved between $30,000 and $100,000.

Consider this example: If you locked in a $500,000 mortgage on principal and interest for one year, you would have saved $30,000 compared to a two-year rate, almost $40,000 compared to a three-year rate, and a whopping $95,000 compared to a five-year rate over the last 20 years.

2. Strategy Two: Split your mortgage

Diversify your risk by splitting your mortgage. Invest in both short-term (e.g., one-year) and long-term (e.g., five-year) fixed rates. This strategy won't yield the lowest average interest rate but provides an average and hedges your bets.

3. Strategy Three: Crunch the numbers

For the mathematically inclined, analyze current interest rates across various time frames. If you believe rates will decrease and the one-year rate is slightly higher than the lowest five-year rate, calculate the average interest rate that would make choosing the one-year rate a smart move. If you expect the average rate over the next few years to be less than 6%, go ahead and lock in for one year.



Disclaimer: Know your budget

In summary, interest rates do more than just drive up the price of your mortgage. They affect the entire property market; as they rise, prices drop, as they fall, prices get pumped up. We are currently in a low-interest environment, so prices are high—but the Treasury doesn’t think this is going to last forever.

Before making your decision, assess your budget and financial situation. Sometimes, opting for a longer fixed rate is the only viable option if you need the cheapest rate available.

In conclusion, the quest for the perfect mortgage interest rate is about balancing cost-effectiveness and peace of mind. While historical data and strategies provide guidance, your financial circumstances should always drive your decision. So, what rate is right for you? It's a puzzle with multiple solutions, and the choice ultimately lies in your hands.

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