Many people are asking whether they should entertain the idea of switching to a 10-year fixed-rate mortgage as they investigate mortgage options currently available in the market.
The decision should be based on three factors
1. Your mortgage timeline:
If you are looking for a longer amortization on your mortgage, you will save more with a 10 year fixed rate mortgage. Your savings will be more pronounced down the road when interest rates are more likely to be higher than they are now. This means a long term 10 year rate could make a lot of sense.
Those homeowners who are looking to pay off their mortgage in fewer than 10 years should probably look to a shorter mortgage term than 10 years unless they are super risk averse. As a general rule the longer the amortization on a mortgage the greater the benefit (in today’s interest rate environment) in going with a 10 year fixed rate mortgage.
2. How Risk Averse Are You?
How partial you are to taking risks is always a factor when making an investment decision and believe it or not what term to take on your mortgage is an investment decision. If you are a nervous nelly who loses sleep wondering if you should have filled up your gas tank before going to bed you may be better served with a longer term fixed rate mortgage. Longer term fixed rates offer the security that some people need at a slight premium over shorter term rates.
Right now the decision to take a longer term is cheaper than usual, as the difference between 5 and 10 year mortgage rates are nearing all-time lows. As the title of this article suggests it might not be a bad idea to pay 0.9% for an additional 5 years of security. After all there is little doubt that rates will be higher in 5 years.
3. Your Opinion:
Opinions are like……… Everyone has an opinion. In my opinion mortgage rates will go up in the next 2 months. I can tell you that from what I see in the bond market and the signs of strength in the global equity markets Canadian Bonds will continue to increase in yield. When Canadian Bond yields go up, so to do mortgage rates. It is as simple as that, many banks would have you believe that it is not so simple but this is just so that they can over charge unsuspecting customers.
Just as Bond yields will increase in the next 2 to 3 months, I believe that they will decrease shortly thereafter. There remain significant economic headwinds that will prevent Canadian Bond Yields from continuing their ascent. At some point in the next 6 to 12 months they will unfortunately come back down as the Equities markets once again balance with the actual economy. If you believe that the economy is still fragile you may not want to pay the premium for a 10 year fixed rate right now. The reason the 10 year fixed rate is so low today is that the experts who trade in these products are also concerned with how long bond yields will continue to increase.
Is timing everything?
Waiting to switch from your current mortgage into a 10 year fixed rate mortgage at the perfect time can be a difficult game. If you lock into a 10 year fixed rate mortgage right now and rates go up and continue to go up you will have won the mortgage interest rate game. If you wait for rates to go up and come back down to lock into your 10 year fixed rate mortgage you may never see the 10 year fixed at 3.99% again.
It is impossible for us to provide you with probabilities of each occurrence, and therefore the expected values of each outcome. What we can do is give you an approximate break even rate based on today’s rate options.
If you took a 5 year term today at 3.09% and rates increase so upon renewal (5 years from today) rates are at 4.5% or more you would lose money and would have been better off taking todays 10 year fixed rate at 3.99%.
Taking into account all the uncertainty in the market today it might not be a bad idea to lock into a 10 year fixed rate. We can try to examine what rates will do in the next 6 months or the next year but the real truth is that no one can know with certainty. The further out you attempt to guess what rates will be doing the greater the probability that you will either be wrong or are overly confident to say the least.
What we do know is that interest rates are at all-time lows and no one can argue with a decision to lock into a 10 year fixed rate mortgage.
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