Counterintuitive thought about mortgages

[drkitten]

Ah. You're talking about a mortgage that covers the entire amortization period. In this situation, I can understand why they'd have to increase the payments if the interest rates change.

However, I've never met anybody who has agreed to a 30-year term. That is extremely risky, because you're locked out of re-negotiating for better terms down the line.

Ah! I see the issue, then.

In the States, thirty-year fixed-rate mortgages are probably still more common than not. But almost all mortgages allow for pre-payment (in fact, I think they are required by law to allow that) so if you can lay your hands on a quarter million in cash, you can just pay it off here-and-now.

Which makes it relatively easy to refinance; you just borrow the quarter million in cash on whatever the new mortgage lenders terms are and pay off the old one.

Similarly, thirty-year ARMs are fairly popular -- they will typically come with a lifetime interest cap, so you are guaranteed that the interest will never rise above (some obscenely large nominal sum).

 

[blutoski]

Ah! I see the issue, then.

In the States, thirty-year fixed-rate mortgages are probably still more common than not. But almost all mortgages allow for pre-payment (in fact, I think they are required by law to allow that) so if you can lay your hands on a quarter million in cash, you can just pay it off here-and-now.

You can make what are called 'balloon payments' in Canada, too, but the mortgage may have terms that limit the amount before you get dinged a service charge. This is why we did 50:50 with fixed and variable - the variable mortgage had unlimited balloon payment options, but the fixed mortgage was limited to 15% of the principal per year before early repayment charges applied. We felt we would be able to make significant balloon payments over the next 5 years.

Which makes it relatively easy to refinance; you just borrow the quarter million in cash on whatever the new mortgage lenders terms are and pay off the old one.

That'll work, but I guess I'd be frustrated if the concern was about quality of service, and I couldn't get a new mortgage for the remaining amount to close out the original.

Similarly, thirty-year ARMs are fairly popular -- they will typically come with a lifetime interest cap, so you are guaranteed that the interest will never rise above (some obscenely large nominal sum).

Well, colour me educated. As a comparison, have a look at the largest mortgage lender in Canada's current offerings:

http://www.rbcroyalbank.com/products/mortgages/view_rates.html

Anything longer than 5y is closed, and the closest to a 30y is a 25y with current rate of 8.05%. I don't imagine they sell a lot of these.

 

[Typicallucas]

... I started on a 5 year fixed rate and when that ended I refinanced with another bank and chose a 10-year fixed rate that they were flogging. 1.9% interest (but there's some up-front fees and you have to pay a guarantee company to guarantee the mortgage for the bank too). Still, I'm saving money because my old bank was going to jack up the interest after the first 5 years.

If you are obtaining 5 and 10 year "fixed rate" mortgages that get jacked up after 5 and 10 years... isn't that just a 5 or 10 ARM - adjustable rate mortgage??

It was always my understanding that a fixed rate mortgage is fixed for the life of the loan. Not fixed for the first 5 or 10 years.

I don't know the answer to your original question. I tried to figure it out but I think it will take someone who is smarter with math than I am.

I suspect that it will depend on the terms of the two loans, which one will cost less over all. Also you would have to make some assumptions about what will happen with interest rates and inflation, which may or may not be close to what happens in the real world.