Should You Consider a 10-Year Fixed Mortgage?
By Bob Alexander, Accredited Mortgage Professional with Mortgage Doctors - November 2019
Ten years ago, the Bank of Canada declared that the recession was essentially over in Canada and so far, we have managed to avoid another one. There is talk that Canada might be entering another recession but I am hoping this is just speculation and nothing else.
With the number 10 in mind, it might be time for mortgage holders and buyers to consider the 10-year mortgage. I have always stressed having a strategy when deciding on what mortgage product is best for my clients. This strategy involves paying the least amount of interest over the life of owning a home and not necessarily the lowest rate. We are now at a perfect time in history to show the benefits of this strategy. Currently, the 5-year fixed mortgage has a rate of 2.69% which is the lowest 5-year fixed rate I have seen in a long time. While this is a great rate, the 10-year mortgage with a rate of 3.04% to 3.19% (determined by loan to value) should also be considered. This is the lowest 10-year rate in over 60 years!
If fixed-rate mortgages are currently the lowest, they have been in a very long time they can really only go up. If you review the history of fixed and variable rate mortgages in Canada for the last 25 years, each low-interest period is followed by a rather quick increase in rates. This increase will surely happen again but by how much?
No one knows for sure but historically (per the Bank of Canada) the average posted 5-year fixed rates have averaged 8% over the last 25 years. Discounted rates (the rates that I can get) are approximately 2% below this, so 6%.
The key to considering the 10 years is the understanding that you will pay more interest in the first 5 years (3.04% versus 2.69%) and gamble that fixed interest rates in 5 years’ time will be high enough to more than offset this.
Clients should also be aware that the 10-year mortgage is fully portable (you can take it with you when you buy another home) and if you decide to pay it out early, the only penalty will most likely be three months interest. This is because the chances of IRD (interest rate differential) applying are slim to none. IRD only applies where current rates are lower than the mortgage rate you have. Today’s rates are the lowest I have seen so the chance of even lower rates in 5 years’ time is almost unthinkable.
This strategy applies to both clients buying a home today as well as those of you in existing 5-year fixed-rate mortgages of 2.89 % or higher. I can switch you out of your existing mortgage at no cost other than the payout penalty, which depending on the amount, can be added into the new 10-year mortgage.
Think about it and if you have any questions about this subject or anything else mortgage-related that you want to investigate further, please let me know!
If 10 years seems too long – I can also offer a 7 year fixed at 2.89%
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