10-Year Fixed “Insurance”

10-year-fixed-mortgage Wouldn’t it be nice, other things being equal, to know your mortgage payments until 2020?

The cost of that certainty is steep, unfortunately, as per this story by the Post’s Garry Marr (featuring one of our clients, incidentally).

One of the takeaways is that 10-year terms cost considerably more up-front than 5-year terms. The article equates this difference to an extra “insurance premium,” and that it is.

"The question is, is the insurance policy worthwhile?” says TD’s chief economist, Craig Alexander.

Today’s 10-year fixeds are guaranteed to cost roughly $6,900 more than a 5-year fixed over the first five years.* That’s $6,900 for every $100,000 in mortgage. So if your mortgage is $300,000, you’re paying a whopping $20,700 over 60 months for the “peace of mind” of a 10-year fixed.

“For many people it just might be (worthwhile)," Alexander says. 

We ourselves don’t come across many people where a 10-year makes sense.  Mind you, the story suggests 10-year terms “never work,” but that is hyperbole more than anything. In reality, based on our last historical simulation, 10-year terms beat two consecutive 5-year terms roughly one out of 10 times. (See: Fixed Mortgages: 10-Year or 5-Year)

If you ask most people, the odds of the decade mortgage prevailing this time around are miniscule, assuming you buy into the low-growth/low-inflation economic theory.  Indeed, 5-year rates would have to explode 3.55 percentage points higher in 60 months for a 10-year term to beat two five-years.  That implies a roughly 3.55% leap in bond yields.  For that, Canada would likely need sustained China-style economic growth and inflation, and that’s about as likely as the Detroit Lions winning the Superbowl (we say that being hopeless Lions fans).

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* Assumes a well-qualified applicant, 25-year amortization, equivalent monthly payments, a 4.95% 10-year fixed rate and a 3.59% 5-year fixed rate.

  1. This is interesting. I like doing the same comparisons with 3 and 5 year rates as well.
    The current rate offering from Merix is making 3 year rates look like the way to go. What are the chances that you will be able to get 4.80% for a 2 year term in 3 years?

  2. Unless the mortgage is portable, a 10-year mortgage means committing to owning that same property for 10 years. How many are prepared to do that? The penalty for prepaying the mortgage in the first 5 years of a 10-year term could be prohibitively high, even if rates rise in the interim. (Of course, the mortgage would be open with 3 months penalty after the initial 5 years, unless the original borrower was a corporation)

  3. In term comparison most people only look at the cost of the very mortgage assuming all other personal factors remain stable. But what if illness, unemployment, work related temporary move abroad etc fall into renewal time? Personally, I have been on the payroll abroad before, while traveling heavily between Canada and the rest of the world for work, and guess what kind of rate offer you get from a bank if you have no income in Canada? I took a 10 year term at 4.99% taking advantage of the fact that NOW I have income in Canada. It saves me time and effort, since I do not have to shop for rates for 10 years and can focus on other things in my life and I do not have to worry about renewal terms, since with my current payments my amortization is exactly 10 years. I can make my payments from Australia or Europe or even welfare, the bank does not have to know or care.

  4. What if you get flattened by a Mack truck? What if a piece of frozen toilet waste falls from an airliner and smashes you in the head? Don’t let events with low likelihoods scare you into overpaying for your mortgage. Self insure by taking the shortest term your risk tolerance will allow. If you live abroad, fly back to Canada if you have to renew. Just never ever ever take a 10 year fixed. You’ll save thousands over your mortgage lifetime!!

  5. Is there a calculator that compares 5year vs. 10 year? How do you figure out what the 2nd 5 year rate (7.14% in above example) needs to be to compare whether the current 10 year or 5 year is the better deal? Thanks

  6. Everybody has to assess the probability of some of those events in their case. Some people live extremely stable and monotone lives and some, like me, don’t. I am not a Canadian citizen and I live in hotels around the world during the week while spending the weekends at my home in Canada. I am not even sure how that will affect my permanent resident status in the long term. One thing I am sure of is that I will be able to carry the cost of my house in the next 10 years.

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