Have rates ever been this low? With historic lows for the 5 year and 10 year terms, it is very enticing to take advantage of today's low interest environment. The question is whether one should go for 5 or 10 year. Before I answer the question, consider the following:
- US Federal Reserve stated its benchmark rate will remain at or near zero till the end of 2014
- Canadian household debts is at an all time high and will continue to increase since Bank of Canada has to remain close enough to the US Federal Reserve benchmark rate, otherwise the Canadian dollar will skyrocket negatively affecting exports in a sluggish global economy
- Governments around the world have been "stimulating", printing, money since late 2008 to get the global economies growing again which has lead to high government debts and deficits. Basically, governments are carrying the load until the private sector feels it is their time to start spending again.
- The European zone is in crisis and it is taking on huge amounts of debt by bailing out countries
These factors will eventually lead to inflation, but when will it happen? in 2015? 2016? 2020? No one really knows, but it will happen. In my opinion, the longer the rates remain superficially low, the more aggressive the increases will be to control inflation.
Homeowners who are taking on or renewing their mortgages in 2012 will renew in 2017 (if they take a 5yr term). Based on the fact the US Federal Reserve will keep its rate at or near zero and the Bank of Canada will stay relatively close till end of 2014, it is likely aggressive rate increases will commence in 2015 to control inflation and slow down Canadian household debt.
Today's 10 year fixed mortgage term is at an all time low and provides a good protection from economic and rate shocks. Consider this: would you take a 5 year fixed at 3.99% in 2017? What's the risk of a 10 year term one might ask? The mortgage is portable and assumable and the day after the 5 year anniversary, the penalty is based on 3 month interest NOT interest rate differential. I believe it is a great time to consider a long term safe mortgage strategy. To run your personal mortgage analysis comparing 5 year term versus 10 year term, please contact me.