Let’s look at the goal of taking out a mortgage. You pay interest to somebody because you don’t have the cash to buy out the home. So if you’re lucky enough to pay off your home in 15 years, you want to have a strategy that's going to equal the lowest average interest rate of your entire mortgage over the 15 years. The lower your average rate, the less you’re going to pay to lenders.

Everyone taking a 5 year term today is going to do great because rates are great. But where are they going to be over the life of their mortgage? The strategy in a hockey game is not to win the first period and lose the game because you had a bad second and third. The strategy must be to win the game. To do that, you have to take into account all the possible risks.

Are we forecasting interest rates to double in the next five years? No. But we’re sure that in 1976, they weren’t forecasting that either. The same thing happened during the Quebec referendum. Five year interest rates in 1994 averaged 7.2% in February. By July of 1994, they’d gone up to 10.69% because of the need to stabilize the Canadian Dollar. They went up over 3% in four months! One thing we’ve learned is there’s no guarantee. That’s why we say if it could happen in the past, then there’s absolutely the potential for it to happen in the future.

The one type of consumer you’d think would be risk-averse is first-time buyers, since any drastic increases in debt load could certainly impact their budgeting. But ironically, they’re the ones who often say, "No, I want to take the risk and try to save money."

These are the lowest rates we’ve seen in 50 years and we think the window of opportunity may only be open for the next 6 months. The U.S. economy isn’t going to stay weak forever.

Eventually it’s going to pick up and bond yields will start rising and long term rates are on their way back up. A few years from now when interest rates may be back in the 5.5-6.0% range, we’ll look back and say, "Remember back in 2006 when we had 5.00% for 10 years?"

We actually ask some clients considering a short term strategy, "What’s the absolute best average rate you could get over the next 18 years?" Some might say the best they could achieve would be in the high 6% range. And we’d point out that at an even lower rate, they could have a 100% guarantee for 18 years.

Then we ask them, "What’s the worst possible average rate you’d have to pay over the same 18 years?" And maybe they say an average of 10% or 11%. In fact, according to the Bank of Canada, from 1967 to the end of 2001, 5 year rates averaged 11%. In today’s environment, it’s common to get 1% off that posted rate, so if they averaged 10% over the 18 years, that’s almost double what we could guarantee them for 18 years!

Some people choose a short term mortgage because of the attractiveness of the payment. This is a dangerous strategy. If they don’t lock in a fixed monthly payment and all their household budgets are based on the low payment they start with, there can be a real problem when their payment rises.

With rates this low, people who got mortgages a few years ago in the low to mid-6% range may find it worthwhile paying a penalty and getting into today’s lower rates. In other words, someone paying 6.75% now with maybe 7 years left in a 10 year term may a 3 month interest penalty or slight interest rate differential to drop down to 5.65% on a 10 year. They’re going to save way more money with that lower rate than they’ll pay in a penalty. So these rates are not just an opportunity for clients purchasing homes, it’s also an opportunity for existing mortgagors to save thousands in interest.

The case for the variable rate is simple.  The bond market hedges a 5 year rate, similar to having an insurance premium, to get the interest rate for the fixed mortgage rate, whether it is 2 yr, 3yr, 5yr, etc.  The variable rate has no hedging in it, as it rises and falls with the prime rate, hence you could maybe assume that the variable may in the long run still work out to be cheaper.  The trending analysis looks like rates will remain low for the forseeable future.  As long as there is significant competition to keep inflation in check, the Bank of Canada has little wiggle room to increase rates.  Does this mean that prime will remain this low forever?  Probably not.  However, if you do an amortization schedule for a variable rate mortgage, the savings become crystal clear, and if you would commit to paying the same on a 5 year variable, as you would for a 5 year fixed, you put a whole lot against the principle, thereby reducing your time to pay off your mortgage.  For a person in a variable rate mortgage to lose vs. a 5 year fixed mortgage, rates would need to go up by at least 200 basis points to bring the variable rate mortgage in line with the 5 yr fixed.  IS THIS GOING TO HAPPEN?  Possibly.  But remember this, using analysis from the 1960's in comparing the variable rate to the 5 year fixed rate, 9 times out 11 the variable mortgage gave the most interest savings and maximized the principle reduction.