Smoke and mirrors - longer-term may be better...

In the last week most banks and wholesale mortgage lenders have raised their four- and five-year rates.  It was a marginal increase but we're now programmed to think we can get a five-year fixed rate mortgage for under three per cent.

What I've found in the last week is that there is now mortgage lenders are promoting their three-year fixed rate mortgage. Why? Because the rate could still be under three-percent.  Is this a good financial decision? It depends...

I recently had a client who came to see me about moving into a bigger home.  She will be starting a family and needed more room. She also went to see her bank (Scotia) and they managed to convince her that the three-year rate was the right decision.  What do you think? Here's my analysis...if we consider the 10-year average on fixed-rate mortgages, the rate is close to six-percent. I'm also renewing clients I did mortgages for five years ago and the best rates at that time where about 5.7 per cent.

Considering that in three years the rates may show a spike of about 3 percent, on a $400,000.00 mortgage, amoritized over 25 years, that would mean monthly payments would increase by about $600/month.  When you're on maternity leave, or are paying daycare costs, that increase is significant.  In this scenario, my recommendation is to go to a longer term (at least a five-year fixed rate mortgage). Although you may be paying a little more in the short-term, it is worth the extra security.