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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).


* 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.