Should I Lock in My Mortgage?

I get asked this a lot. What would I do if faced with a 2.5% mortgage coming due with rates now at 6% for a 5-year term in Canada or 7% for a 30-year term in America?

The first thing I do is get perspective. When we bought our first home from my parents in 1980, after the appraisal that put the value at $63,000, my dad offered it to us for $60,000, and he would hold the mortgage at 5.5%. If I could have gotten one from a Bank, we would have been charged 14% or more, which was the going rate at the time, so 5.5% from my parents was a gift. We are still very thankful for that generous gift from my parents. No Bank would give me a loan in 1980.

Today, if your mortgage was 2.5% to be renewed at 6%, you are making a mistake by comparing one with the other. While it is natural to do so, it distorts the true cost of a mortgage today.

Because this is your personal residence, you first need to decide if you are paying within the 30% rule on your house. You should be spending no more than 30% of your family's take-home income. If you are spending more than that you have two choices. Increase your monthly income by getting another part-time job or moving. In America remember you can deduct your mortgage payments from your income so calculate that before you compare it to your 30%.

If I could still sit within that 30% rule, I’d renew at the 6% or 7% for as long as possible. It’s a great historical rate.

But before you do all of that, remember your personal residence is NOT an investment. It is a total expense. The only time it is an investment is if it produces income. You have an extra apartment in the basement or live on one side of a duplex that you purchased, which now puts you in the investment game. Making positive cash flow or even if at break even in a duplex where the other tenant pays all your bills, is a genius way to live when starting out. If I were in that situation, I would lock in my mortgage rate right now for as long as I could.

At 6% or 7%, it’s a gift regardless of where it’s coming from.

Listen to my free podcast, Invest Like a Honeybee, wherever you get your podcasts.

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