A lot of investors right now are making the same bet. They’re picking two or three year mortgage terms because they think rates will drop soon. Then they can lock in at those lower rates when their term is up.
Sounds smart, right? But there’s a huge flaw in this thinking that could cost you thousands of dollars.
The Problem With Timing The Market
Here’s what’s actually happening. Right now, five year fixed rates are roughly one to one and a half percent cheaper than two or three year terms. That’s not a small difference.
Banks do this on purpose. They want you locked in longer, so they discount the five year rate more. It’s better for them to have you as a customer for longer.
But investors are willing to accept that higher rate for two or three years. They’re gambling that when their term is up, rates will be so much lower that they’ll save money overall.
Book Your Strategy CallThe Math Doesn’t Add Up
Let’s think about this clearly. You’re paying one to one and a half percent MORE for two or three years. That’s real money coming out of your pocket every single month.
For you to actually save money with this strategy, rates would need to drop way more than that one to one and a half percent. If rates only drop the same amount you overpaid, you break even at best.
And here’s the thing. Mortgage lenders and economists are saying if rates do drop, it won’t be dramatic. They’re not going to slash rates like they did during COVID or the recession. Any drops will be calculated and slow.
Nobody Can Predict The Future
We’re in a unique situation right now. We’ve never seen a rate environment quite like this. COVID happened, then rapid rate increases, and now we’re technically in a recession based on GDP numbers.
The Bank of Canada’s long term goal is actually to have rates higher than they are now. Many of today’s rates are pretty close to pre-COVID levels. We just feel the pain more because they went up so fast instead of gradually.
What You Should Do Instead
My advice? Pick what works best for you right now. Don’t gamble with your money based on what might happen in the future.
If you want a lower payment and better cash flow today, get the five year fixed. It’s cheaper right now, and that matters. You’ll save money for the next few years guaranteed, not based on hopes and guesses.
If You Really Think Rates Will Drop
Let’s say you really believe rates are going to drop and you want to take advantage of that. Here’s the problem with a two or three year fixed term: you’re still locked in.
What if the lowest rates happen in one year? You’d miss out because you’re stuck in your term.
A better option? Go with a variable rate instead. When the Bank of Canada lowers rates, your rate drops automatically. You don’t have to time anything. You don’t have to guess when rates will hit bottom.
Plus, you can convert a variable rate to a fixed rate at any time. If you see rates drop and think that’s as low as they’ll go, you can lock it in. You have complete flexibility.
Why This Matters For Your Portfolio
As an investor, your mortgage rate affects more than just your monthly payment. It affects how much you qualify for on your next property.
Lower rates mean a lower stress test. A lower stress test means you can qualify for more financing. If you’re trying to grow your portfolio, getting the lowest possible payment is huge for your ability to keep buying.
When you pick a higher rate on purpose (by choosing a two or three year term), you’re not just paying more money. You’re also limiting your future buying power.
Don’t Follow The Flock
I see this all the time. Investors hear what other people are doing and follow along without really thinking it through.
Half the investors I talk to about this get it right away. The other half are so convinced rates will drop that they can’t see they’re setting themselves up to overpay.
Sit down and actually write out the numbers. Calculate how much extra interest you’ll pay with a higher rate for two or three years. Then figure out how much rates would need to drop for you to come out ahead.
You might be surprised at what you find.
The Bottom Line
Nobody knows what rates will do. Not me, not the lenders, not the economists. Anyone who says they know for sure is guessing.
What we do know is that five year fixed rates are significantly lower than shorter terms right now. That’s a fact, not a guess.
You can either take the savings today, or you can gamble that you’ll somehow time the market perfectly and come out ahead. Based on what lenders are telling me and what makes mathematical sense, most investors who pick shorter terms are going to end up paying more.
Think about what makes sense for your situation today. Not what might happen, not what you hope will happen. What actually makes sense right now.
Your future self will thank you for making a smart decision instead of a hopeful one.
Book Your Strategy CallFrequently Asked Questions
Banks discount 5 year rates more because they want you locked in as a customer for longer. It’s better for them to have a guaranteed customer for 5 years, so they make the rate more attractive. Shorter terms cost you more because the bank has less certainty.
This strategy is risky because you’re paying 1 to 1.5% more now for 2-3 years. For you to save money overall, rates would need to drop more than what you overpaid. Lenders say any rate drops will be small and gradual, not dramatic, so you’ll likely end up paying more with this approach.
If you really believe rates will drop and want to benefit from that, a variable rate is better than a short fixed term. With a variable rate, you benefit immediately when rates drop, and you don’t have to guess the timing. You can also convert to a fixed rate anytime if you think rates have bottomed out.
Lower rates mean lower payments, which means a lower stress test. When you have a lower stress test, you qualify for more financing on your next property. If you’re building a portfolio, getting the lowest rate possible helps you qualify for more properties down the road.
Yes, you can convert a variable rate mortgage to a fixed rate at any point during your term. This gives you flexibility to lock in if you see rates drop and think they won’t go lower, or you can ride out the variable rate if you think more drops are coming.
Today’s rates are actually pretty close to pre-COVID levels. Rates dropped dramatically during COVID, which wasn’t normal. The pain we feel now is because rates went up so quickly, not gradually. The Bank of Canada’s long term goal is actually to keep rates higher than where they are now.
If you want certainty and the lowest payment today, a 5 year fixed rate is your safest bet. It’s significantly cheaper than shorter terms right now, gives you stable payments, and helps you qualify for more properties. Don’t gamble on what might happen when you can take guaranteed savings today.
Lenders say no. If rates do drop, they expect it to be calculated, slow, and not as dramatic as previous recessions. The Bank of Canada wants rates higher long term, so any drops will likely be modest. Don’t bet your mortgage strategy on hoping for massive rate cuts.
