Risks of 1 Year Fixed Mortgage Rates
The main risk for 1 year fixed mortgage rates, is that the rate is currently substantially higher than a 3-5 year fixed term, and even higher than some variable rates. So there is the risk that if rates do not drop within 1 year, you will have paid too much for the one year and be stuck renewing at another higher rate.
For example, what if inflation rebounds and mortgage rates need to remain higher for an extra year? What if, due to a weak economy and housing market, banks keep rates higher, to cover the added risk, even if the financial markets indicate rates should be dropping?
Another risk is, that if there is a recession in one year and employment is temporarily affected, this can potentially affect the renewal. Your bank may try to ‘auto renew’ your mortgage at a very high rate, and if your mortgage can’t be shopped/switched because it no longer qualifies at a different lender, then this could be very costly. If your mortgage is with the same bank your daily banking is with, they can see how income is affected and may act on this.
More on mortgage renewal is in the section just below.
A 1 year fixed mortgage rate in Ontario may prove to be a good decision. But for the above reasons, some will consider a two year fixed or three year fixed term to provide more time for rates to fall and for the economy to stabilize. In addition, these slightly longer terms carry lower mortgage rates.
Renewing Your Mortgage into a Fixed Rate
Renewing your mortgage into a one year fixed rate can be a good idea depending on your goals and understanding of this mortgage type.
One important aspect of this mortgage is that it is a relatively short amount of time. This means that a 0.20% difference in the mortgage rate may not add up to the kind of savings we are used to when considering a 5 year fixed mortgage rate.
For example, 0.20% less may save you $5,000 over 5 years. But over 1 year, this same 0.20% savings may be just $1,000. Now, consider there is usually a discharge fee of about $300 to exit most lenders, and there could be other costs involved, too, such as a legal cost or appraisal cost, not with all lenders but with some.
Finally, your time needs to be taken into account. If you’re spending 2-3 hours to save $200, this may not be worth it for you. Then again, the savings could be much higher and mortgages can be renewed in as little as 1 hour. So the point is to be mindful of the benefits when renewing your mortgage rate one year fixed.
Connect with Altrua Financial for a custom cost-benefit analysis to determine your exact savings.