10-year mortgage is worth a look
By Kerri-Lynn McAllister | Sun Jan 29 2012
More than 90 per cent of Canadians with a mortgage take out a term of five years or less, and just 1 per cent opt for a term that is 10 years or more, according to the Canadian Association of Accredited Mortgage Professionals.
But with 10-year mortgage rates at a record low of 3.79 per cent, it might be time to reconsider the long-term mortgage and buck the national trend. It offers security, peace of mind and a gap between five-year rates that makes it particularly attractive.
Longer terms cost more because you’re getting that added security, and in the past, Canadians have been unwilling to pay. But with a mortgage price war pushing the five-year fixed mortgage to 2.99 per cent and the 10-year to just 3.79 per cent, the difference is just 0.8 per cent.
On a $250,000 mortgage the monthly difference between the two is around $100. That may be your price of a good night’s sleep. Two years ago, the spread was 1.5 per cent, which doubles the monthly difference to $200, or $2,400 per year.
That’s why the 10-year mortgage is so much more attractive now. Here are four reasons to consider it:
Small down payment: If you have a small down payment, you have a big mortgage. A 10-year term protects you from rising interest rates for twice the length of time as a five-year term. During the first five years of a high-ratio mortgage, most of the payments have traditionally gone towards interest. It's a better balance now, but if at the end of five years you’ve paid very little principal and rates are higher, you may not have much room to increase the amortization and maintain the same payment. A 10-year term offers that much more breathing room.
Peace of mind: A 10-year term makes household financial planning and budgeting that much easier. This is particularly true for real estate investors who want to take the risk out of financing and budget cash flows.
Smaller penalties: Many people avoid the 10-year mortgage because they don’t want to be locked in for such a long period of time. They are also afraid of the size of the penalty if they break it. But, you will actually pay a smaller penalty for breaking a 10-year mortgage in some cases, than if you break a five-year mortgage part way through. After the five-year mark in a 10-year term, you will only have to pay three months interest to break your mortgage per Canadian legislation.
Breaking a fixed mortgage with terms of five years or less is subject to an Interest Rate Differential (IRD) penalty which is typically much higher.
Less long run interest: You could end up paying less interest in a 10-year mortgage than with two consecutive five-year terms, if rates rise. Although you pay more in the first five years with a 10-year rate than a five-year rate, you could save in the second half of your 10-year term.
Given that rates are at historic lows, they have nowhere to go but up, though how far and when is unknown. What is certain is that mortgage rates would have to remain below long-term averages for two consecutive five-year terms to win out.
Of course, your circumstances can change over time. So make sure that whatever term you choose your mortgage is transferable from one house to another. The 10-year mortgage deserves a closer look. After all, deals like this do not come along every day.
Also read: Why it's a good time to buy a home
Kerri-Lynn McAllister is the community manager forRatehub.ca a site that compares Canadian mortgage rates.