Should You Consider a 10-Year Mortgage?

May 28, 2012

Mortgage Monday

There’s been a lot of talk lately about whether or not folks should be taking advantage of the sub-4% 10-year fixed mortgages.

With the 5-year fixed mortgages hovering just above the 3% mark, you will pay a little bit more to lock in for 10 years (though the spread between the 5-year and 10-year is a lot less than it has been in the past).  That alone makes the 10-year a little less popular (it’s hard to commit to a little bit higher rate up front in the hopes that rates go up enough to justify the extra cost).

Another common concern about locking in for 10 years is the fear of the penalties if you have to get out of that mortgage early for one reason or another.  While it’s true if you need to break that mortgage in the first 5 years, the penalties can be high (though with most mortgages you can easily port it to a new house, so it’s not like you’re locked into that property for 10 years…).  But what most people don’t realize is that in Canada, the most your penalty can be beyond the first 5 years of the term is a 3-month interest penalty.

The best way I’ve heard it described is this:

Think of it as a slightly higher 5-year rate, and with that slightly higher rate, in 5 years you have the option to renew at the same rate for an additional 5 years. The cost of not exercising that renewal option is only a 3-month interest penalty.

Obviously whether or not you pick a variable rate, a 3-year term, a 5-year term, or a 10-year term, will depend on your tolerance for risk.  There are pros and cons associated with any term… but in my opinion, with sub-4% 10-year mortgages out there to be had, make sure to give the 10-year a long, hard look.

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About Tim

Tim is a mortgage agent in Barrie who specializes in helping first-time home buyers. He works with a variety of lenders and can help customize a mortgage with the best rates & options that fit the needs of each customer.

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