A 1-Year Fixed Strategy

1-year-or-variable-mortgage The odds are fair that prime rate is heading 25 basis points higher in one of the next two Bank of Canada meetings. (See this Reuters’ poll)

After that increase, many analysts foresee a pause of at least six months before rates resume higher. Rates are then expected to climb modestly until prime rate gets closer to its 4.65% ten-year average.

This scenario has some people thinking that a variable rate is just what the doctor ordered. If you happen to be in that boat, there’s an even better strategy to consider.

If you do a little digging you’ll find various brokers offering 1-year fixed rates near 2.25%.  These offers are a fantastic alternative to variables, for a few simple reasons:

  1. If the BoC hikes rates 1/4% in the next few months, your 2.25% one-year fixed will be equivalent to a prime – 0.75% variable.  (Prime – 0.75% is presently an extremely good rate for a variable.)
  2. A 1-year fixed gives you total protection against further rate increases for one whole year. If the BoC hikes again within 12 months (very possible), you’ll instantly save money over a deep-discount variable.
  3. Renewing in one year affords the opportunity to switch into a variable at a potentially better discount than you can get today. (There’s no guarantee, but the chances are pretty good.) That switch can be free of charge depending on the mortgage type, lender and/or the broker you’re dealing with.

So, if you’re hunting for a variable, play the odds and have a peek at today’s 1-year fixed terms instead. Your mortgage planner can provide complete details on either option.

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Common Sense Reminder: Rate predictions are subject to change due to random events. Take the above analyst forecasts for what they’re worth. One-year terms are not suitable for everyone.

Source: Canadian Mortgage Trends

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