Episode 52

Ep 52 - Short Term Mortgage For Interest Rate Savings?

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Show Summary:

In this episode of the Wisdom Lifestyle Money Show, host Scott Dillingham discusses the interest rates and mortgage options in Canada. Many investors are concerned about the direction of interest rates and whether they should opt for a shorter-term mortgage or a five-year fixed term. It's important to note that the government of Canada raised the rates a few weeks ago and there is speculation of further rate hikes this year. However, predicting interest rates is not certain, as it involves economic guesswork.

Some investors believe that while short-term rates may rise, long-term rates will eventually decrease due to the country's recessionary state. Historically, during recessions, interest rates tend to lower to stimulate the economy. However, lenders caution that any future rate cuts will likely be moderate and gradual, not as drastic as during the COVID-19 pandemic or the recession in 2007-2008.

Many investors want to lock into two or three-year fixed terms, hoping to take advantage of lower rates in the future. However, this approach is flawed because they fail to consider the extra interest they would pay during the initial two to three years. If the rates drop only slightly, the savings might not offset the higher interest paid in the early years. Lenders do not anticipate significant rate decreases. Therefore, it is likely that investors will end up paying more overall.

Scott advises investors to make decisions based on their current financial situation rather than trying to predict the future. If the idea of lower interest rates appeals to them, they should consider a five-year fixed term, which offers a lower rate compared to two or three-year terms. Alternatively, if they are confident in rate decreases, they could opt for a variable rate mortgage that adjusts with market rates. However, timing the market is challenging, and choosing a variable rate allows flexibility to switch to a fixed rate if desired.

Ultimately, the decision depends on individual circumstances. It's crucial not to blindly follow trends and to carefully assess the options. Scott encourages listeners to consider their present needs and consult with mortgage brokers or professionals for personalized advice. By making an informed choice, investors can avoid overpaying and ensure their mortgage aligns with their financial goals.


Scott Dillingham: Welcome to the wisdom lifestyle money show. I'm your host Scott Dillingham today. I'm recording this one at home. It's a bit different than the normal format, but. I was out on my on my motorcycle and I was going around and I thought of this and it's something that happens all the time with clients nowadays. And.

Pretty much, what they want to know is what are the interest rates doing? Where are they going? And should we lock into a shorter term? So then when that term is done, maybe the rates are lower or should we go with a five-year fixed and move forward. I wanted to just have a discussion with you on this.

ing up. It's it's now June of:

People are suspecting that they're going to raise the rates again this year, too. It's hard to say, right? These are economics guessing, and it's a guess, right? It's an educated guess, but it's still a guest, so it could be wrong. So we don't really know. If the rates are going to go up or not.

But what a lot of investors are trying to do is they're trying to beat the system. They're trying to think. Okay. Look. We suspect the rates might go up in the short term, but in the longterm, they'll go down. And. It's true. Like Canada on paper is in a recession, right? If you look at the gross domestic product of Canada and the definition of a recession, we are in one.

Fiscally and financially. We haven't felt it per se. We have felt the cost of goods being quite high. But there's still like good employment numbers, good jobs. Obviously this is not covering all cities. I realize some cities and towns might, struggle with these things. I'm referring to very, a broad approach where I'm speaking of the Canadian economy as a whole.

Every recession, the rates lower. Okay. That's what we expect. And they do that to boost the economy. Now the lenders that I'm speaking to are saying, look, Scott, if. The bank of Canada does lower the rates. It's not going to be like what it did in COVID or in the oh seven. Oh, eight recession where they just slashed rates like crazy.

It's going to be calculated and it's going to be slow. And they also don't believe the rates are going to drop that much. They're suspecting that they just drop a little bit. Where I know a lot of investors are hoping they get slashed that just dropped 2% overnight. And.

I guess at the end of the day, nobody really knows. What's happening, but I do see a challenge is that Clients are wanting to lock in. To two or three-year fix. Because their thought is, look. If I get a five-year fixed. I'm accepting a rate for five years, but if the rates come down. I'm going to miss that, decrease in rates. So overall I'll be paying more. And I think this is incredibly flawed thinking.

And when I explain this there's. I would say maybe half the investors get it. And half don't. So my word of caution to you is. Don't follow the flock. Use your emotions, think about it and think what makes the most sense for my scenario right now? And I'll explain it. And then you can decide what to do.

So what the investors are anticipating is the rates are lower. So they're getting, or wanting to get a two or a three-year fixed. With the goal that when that two or three years has done that the rates are lower. And then they can lock into something different. So overall they'll save money, but it's incredibly flawed because they're not literally.

Writing down the interest that there. That they're paying. So if you get a two or a three-year fixed, now, these are basic averages. I recommend speaking to us or another mortgage broker to get the exact. Numbers for you and your scenario. But if you think about it, The five-year fixed rate now is roughly one to one and a half percent cheaper.

Then the two. In the three-year terms. Now that's an average rates. You might find some that are just slightly lower than that, but you will also find some that are higher than that. So I'm saying. On average, you're one to one and a half percent higher of a rate. And if you go with a two year or a three-year now in all honesty, the banks do that on purpose because they want you to lock in for longer, because it's better for them. They have a customer for longer, right? So the discount, the five-year more right, but the argument becomes this.

We know that the lenders and. The economics are saying, if the rates go down. It's only going to be a little bit, it's not going to be a lot. So we're not going to slash multiple percentages. Like what they did in the past. So with that thought in mind, right? You're willing if you go with a two or three year right now,

That means you're willing to accept the rate. That's roughly one to one and a half percent higher than the five-year. And you're going to have that higher rate. Four. Two to three years paying one and a half percent higher than what you thought you might Have if you've got the five-year fixed.

And they're doing this with the gamble that the remaining two or three years left, depending on the initial term that they picked compared to just going with a five. That those rates are going to be lower. But what they fail to realize is those rates have to be drastically lower. To make up that savings or else you're paying the money. Because if the rates drop one and a half percent

It's going to be a wash for you. Do you know what I'm saying? Cause you're overpaying one to one and a half percent for the first couple years. And then the next couple of years you might save. One to one and a half percent. If that's what it drops. So it has to drop a substantial amount for those savings to kick into play.

And they're saying they're not going to do that. They're not going to drop it big, time. So you have all these people. That I believe are making the wrong decision. Because it's more of a gamble and not to say they're making a wrong decision. I don't want to say that anybody's wrong in this because nobody really knows nobody's can predict the future. But what I'm saying is the thinking is flawed because they're not literally adding up how much extra and interest they're paying over those first two to three year terms. And they're factoring in massive drops, which just aren't going to happen. So overall. The investors are going to end up paying more money out of pocket. I believe in, my opinion.

Because they're saying they're the rates aren't going to drop that drastic. Y gamble. Do you know what I mean? Like why gamble with your money? So my advice and my suggestion. Is get what feels right now. If you like the idea of that lower interest now, which will give you a lower payment and higher cashflow potentially, right? Some markets there isn't cashflow because of the price, but.

And many markets there still is. So depending where you're tuning in from, but sit back and really think is that really what's important to me today. Forget the future. Nobody knows what the future holds. We've not really been through a rate environment like this and then COVID and then recession. It's.

It's different. So nobody really, knows. I also know the bank of Canada's overall goal is to raise interest rates. They want them higher than what they are now. Now they can't just do it overnight. I know they really. Increase the rate last year, but a lot of that was too. Eliminate the discounting that they provided for COVID.

And a lot of the rates now are actually pretty close to pre COVID rates. And I think a lot of homeowners ignore that fact. So they were naturally and gradually going up. And then COVID came and everyone's yeah, everything's so cheap. So just know it's not like they're really higher than they were before. It's pretty much the same.

But we've we felt it cause they raised it so quickly, it wasn't a gradual process. So my advice again is pick what's best for you today. Now let's say you disagree with my statement and you think it is still better to get a two or a three-year term. I'm going to say that's wrong because you don't know the market. What if they do lower the rates?

In a year, and again, I know I'm using the word wrong. I don't intent mean or to call somebody wrong or insult anybody. But what I think is better. A better thought instead of I'm going to go with a three-year term, cause it's going to be better than what if the rates are the lowest in one year.

You know what I mean? And you've still locked in for three. If this is your game plan. You're missing out because you still locked in. If you are somebody that really thinks they're going to lower and you want to capitalize on that. And again, nobody knows. So it very well could happen. Then I would say get the variable rates because the variable rate.

That will adjust. As the rates adjust. If you start to see that it goes down, then you benefit right away. Even if the lowest rates are one year from now. And so that's the challenge with picking a two or three-year fixed is you're trying to not only train to save interest overall in the grand scheme of things, but you're also trying to time the market in time when the bank of Canada is going to lower the rates and.

It can't be timed. They, based that on a lot of different variables. I think if that is your strategy and after hearing this, you still think it's best to choose a shorter term. Then again, I would choose a variable. If you don't know this the variable you can convert to a fixed at any point in time.

So say the rates are the best in one year, or you feel like they're the best and you're hearing the news it's not going to change any lower. This is where we're at. You can convert that and lock it in. If you want to lock it in. Or if you want to stick with a variable and ride that out, you have that option.

But I just see a lot of investors not making those educated decisions. And they're going to end up. Or could end up paying much more? I firmly believe they will end up paying more. Just from what I'm hearing as a mortgage person, as an insider. But again, The lender is telling me this. They don't.

No also, nobody knows what's in the deck of cards. Again, I think if you're somebody who. Really needs that money. Just get a longer locked in, fixed like a five-year fixed. Even if it does cost you a little bit more later, it's going to save you a lot now for the next couple of years. Anyways. Cause it's much lower.

I think that's best, but if you want to write it out, then I would say, go with the variable. Because then you can, you don't have to worry about timing the market. You're still in the game where you can benefit if they go down. But now you're not timing it. When it goes down, it'll go down and you'll be able to capitalize on that automatically. Because you don't even have to do anything. The rates come down. It.

It goes down for you too. So that is what I would suggest. To help you out. Plus. As an investor. The lower your rates, the lower, the stress tests and the lower your stress test, the more you're going to qualify for. So if you're trying to build your portfolio and you're trying to grow, getting that smallest payment is going to be the thing that's very.

Ideal for you to, for your growth plans. So that is what I suggest I welcome your feedback let me know what you think about this. If you have any different opinions, right? It's really unique situation that we're going through. I just, my fear is at. People are expecting this and if it doesn't happen, then we're going to have tons of investors overpaying.

That have much higher mortgage rates than they should have. And then on top of that they're going to qualify for less on the road as they build their portfolio. It's in my opinion, it's it is better to go with the, a fixed. But anyways, thank you for tuning into today's show. I love your feedback. And if you really like the show, please share it. Give us a review. I would really appreciate it. Thank you.

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