Quote:
Originally Posted by Geraldsh
My son is shopping for a mortgage and asked for a 5 year fixed rate. The bank advised him to limit the fixed term to 2 years - what would you advise?
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How sensitive is he to payment changes.
If a 2% increase in interest rate will cause him financial stress then I would lock in for longer. Variable vs Fixed and 2 vs 5 is about risk tolerance and flexibility as opposed to trying to guess what is going to happen next.
So questions like
Is his income going to be higher 2 years from now? If no then the ability to handle rate hikes is lower
Is he planning on selling and not re-buying in Canada? If yes than shorter is better
Can he afford a 2% higher rate at time of renewal?
Can he afford the higher 2 year fixed today?
Are you willing to bail him out if he can afford payments at some point.
In general over the past history of mortgages variable is lower cost. The problem is that we live in a discrete moment in time so on average shorter and more variable should pay off however you have to live with the fluctuations.
Anyway the short answer is don’t try to big the cheapest outcome pick the option with a risk profile you can tolerate.