Mortgage Strategies in Today's Environment

You may be one the many homeowners in Canada who locked into a five-year mortgage in the early 1990s, and are now facing mortgage renewal. The good news is that you can expect a substantial savings on your monthly (hopefully biweekly) mortgage payment when you renew at today's mortgage rates. The bad news is that once again you will be confronted by the issue of which mortgage term to select.

Let's first look at some underlying dynamics of mortgage term selection. Previous market analysis shows how, in an ideal world, mortgage borrowers can optimize their mortgage term selection. A study of alternative mortgage selection strategies over the last 20 years indicates that in theory, mortgage borrowers are better off when they lock into longer term mortgages at the trough of the interest rate cycle and stay short as interest rates approach the peak of the cycle.

In practice, the opposite tends to happen. If you locked into a five-year term mortgage in the early 1990s, you were not alone - there were many thousands like you. What tends to happen is that mortgage borrowers go long as rates are rising. The major motivator is the fear that mortgage rates will continue to rise. Conversely, they tend to go short as rates fall, hoping to lock into a long-term rate when rates are at their lowest.

To learn more, click on the "Bar of Knowlege".

Article by Mary McDonough

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