[mabbo]

This is why I like the Canadian system of mortgages.

I have a 30 year mortgage, but every 5 years I have to "renew" it. At that time, I have to renegotiate the rate for the next 5 years. As part of this negotiation, I can just switch banks if I want. Or to a private lender. Or to anyone really.

It seems weird to me that you are beholden to an entity you've never signed any contract with.

[walrus01]

This is not always a good thing. Inability to lock in a reasonable fixed rate for a 15, 20 or 25 year term in Canada meant that in the early 1980s, for example, when benchmark interest rates were 15%+, people whose 5 year terms came up for renewal had no choice but to renew at 17% interest rates. Ask an older person from AB who lived through the first oil economy bust in Edmonton or Calgary.

[fiddlerwoaroof]

Is there something to prevent the rate from skyrocketing when you renew the mortgage? Doesn't this have all the issues people occasionally have with ARMs?

[eljimmy]

Nope. Rates are based off a prime lending rate which is equal amongst all the big banks. But like they said, you are free to shop around.

Credit unions usually have good offers.

Ideally you’re not buying a home that you can’t afford if rates go up too much.

[krageon]

That assumes there is some sane upper bound on rates, but they can fluctuate quite a lot depending on how the economy is doing (7% doesn't seem like too much of a stretch). I agree that you should not buy a house near your carrying capacity, but I also posit that if you start out 7% lower that it will hurt your standard of living more than you expect.

[Mister_Snuggles]

There isn't really an upper bound, but the prime rate doesn't move much. As another comment said, competition between different lenders keeps the rates in check.

Typically the Bank of Canada sets their prime rate, some time later the big banks set their own prime rates based on that, then the mortgage rates are set based on that. The Bank of Canada prime rate only moves by .25% or .5% at a time.

If you have a variable rate mortgage and the rates change, they will be immediately reflected your mortgage. This isn't as bad as it sounds - your payment will stay the same, the rate change just affects how much goes to interest vs principal. The mortgage documents will include the 'trigger rate' which is how high interest rates need to get before your payments no longer cover the interest. This is the point where you're in trouble.

For some variable rate loans, like an auto loan, an increasing rate just means that the term of the loan gets longer or shorter.

As always, ask questions. The bank, in Canada at least, doesn't really want you to default on the loan. Ask about the trigger rate, ask what happens if it gets hit, ask what happens if rates go up but don't hit the trigger rate, ask about lump sum payments.

[Robin_Message]

The UK typically uses the same system of fixed rates for (usually) 2-10 years.

Story time: several years ago I took out a 10 year fixed rate of 2.99%. My thinking was that since the base rate couldn't really go down any further, I was locking in a good rate.

As it's turned out, so far I could have had a series of 2 year fixed at around 2%, so this was potentially the wrong move, although the maximum downside was limited.

My parents on the other hand took out a 12.99% fix in the early 90's, which turned out to be incredibly unlucky given the unprecedented low inflation of the nineties and noughties.

[crottypeter]

Assuming Canada is like the UK, competition in the mortgage market means a bank hiking the rates will lose your business. Of course you can be unlucky if interest rates are unusually high at the time your fixed rate deal is up for renewal.

[dboreham]

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