RATESDOTCA's Rate Navigator does something no other mortgage tool does. It compares hundreds of mortgage rates and terms, then instantly estimates which term is most likely to result in the lowest interest expense over the next five years.
It starts off with standard rate assumptions from major bank economists. But you can change those rate assumptions to whatever you like to test your own scenarios. If you want to see which term costs less if the Bank of Canada drives up rates two percentage points, simply drag up one or more Prime Rate handles until Prime Rate is two percentage points higher.
At the heart of the Rate Navigator is a complex calculation engine that runs amortization scenarios on every common term (e.g., 5-year fixed, 5-year variable, 1-year fixed, etc.), and series of terms (e.g., a 3-year fixed renewing into a 2-year fixed, etc.).
It compares all scenarios over a five-year period and factors in time value of money, opportunity costs, estimated renewal costs, typical rate spreads (for calculating renewal rates), etc.
Here are the terms and series of terms that it analyzes:
The Rate Navigator ranks each mortgage option based on the present value of its total five-year borrowing cost, including estimated switching fees (which you’d pay if you switched lenders to get a better rate).
The nitty-gritty:
- The rates on future renewals are based on:
- a spread above the 5-year yield (in the case of fixed rates)
- a discount from prime rate (in the case of variable rates).
- RATESDOTCA uses historical spread estimates in its calculations of future renewal rates.
- Payments are assumed to be equal in all cases to avoid questions of opportunity cost.
- The discount rate used for present-value calculations is the variable rate, which is typically the lowest rate of any term.
What is the present value?
Present value refers to what money is worth today. It's based on the time value of money, which is the principle that a dollar today is generally worth more than a dollar one year from now. Why is that? Well, if you have that dollar in hand today, you can earn a return by investing it for one year. You can't do that if you're waiting 12 months to get your dollar.
To put time value of money another way, a mortgage payment one year from now costs relatively less than that same mortgage payment today. That's because a person's earnings usually increase over time, resulting in their mortgage payments being a lower share of their income. The higher the rate of inflation, the less your mortgage payments cost over time.
The Rate Navigator uses present value to compare mortgage costs by totalling up all the mortgage payments (including the final assumed balloon payment after five years). It then discounts (converts) those payments into today's dollars so you can compare which mortgage truly costs the least.
Just remember that this tool looks mainly at interest expense. Things like early prepayment penalties or portability limitations can end up costing you more, so consider mortgage flexibility as well.
