Scotia Ups the Ante on 10-year Mortgages

ScotiabankDespite record-low 10-year fixed rates, one could argue that the odds still favour shorter terms—at least for financially secure borrowers.

The historical advantage of shorter terms and the lower probability of dramatic rate increases are two common arguments against 10-year mortgages.

But last week, Scotiabank weakened these arguments by launching a record-low 10-year fixed rate of 3.69%. In doing so, it made it a little harder to dismiss decade-long terms.

When it comes to term selection, there is a fixation on rate, notes David Stafford, Managing Director at Scotiabank, Real Estate Secured Lending. “We’ve seen customers moving to shorter terms for marginal savings when we think the best advice in this market is to lock in longer and put these rates to work for you.”

David-Stafford“We don’t predict the future, but there are a lot of economic indicators that things are improving – especially south of the border,” Stafford says. “…If we think rates are likely—at some point in the not too distant future—to move back into a more normal range, those taking [shorter] terms now may well look back on this as a missed opportunity.”

At the moment, 10-year rates are far below average. Before the credit crisis in 2007, they were more than two points higher than now.

Stafford maintains that folks who take 10-year terms today should consider making payments “like it’s 2007.” That means making the same payments you would have made if 2007 rates were still in effect. (See: Pay Like the…Olden Days) Doing so partly mitigates the rate differential between 5- and 10-year terms.

5 vs. 10

At the moment, you can get a full-featured 5-year fixed for 2.99% or less. Break-even analysis shows that for a 10-year fixed to be cheaper than a 5-year fixed, 5-year rates must rise over 1.70% in the next 60 months.

Put another way, if you got a 2.99% five-year fixed today and renewed into a 4.70%+ five-year fixed in 2018, you would have been better off taking a 10-year fixed.

Note, however, that statement is based solely on a comparison of regular mortgage interest. There are numerous other considerations with term selection, not the least of which are early breakage penalties. For more, see: Nickel or Dime)

Stafford says Scotiabank is “trying to draw people’s attention to the opportunity in longer terms.” At 3.69%, it’s doing a good job of that, and Scotia’s 10-year volumes should surge as a result.

Rob McLister, CMT

  1. 3.69% is a gift. Rates could jump 1% in 6 months. Don’t gamble with your finances unless you have tens of thousands in the bank. Lock for the long run and don’t look back.

  2. I agree, I think this is a great move by Scotia – and one that should be considered by other lenders, too. After all, just about everyone knows that interest rates are going to rise at some point.

  3. I don’t agree, the research data does not support this. Also, on the assumption the discount on VRMs gets back to historial levels (Prime minus 0.65% or better) down the raod, at the end of the five year term you would likely go back to a VRM. 60 years of research data supporting short term vs. long term is hard to beat! Take the five year term and pay lile the rate is based at 3.69% and you will be better off than taking the 10 year term. Don’t forget client may have IRD penalty if they sell before 5 years is up and the avg. consumer moves every four years.

  4. Gerry makes some good points here. Life can get in the way over 10 years. Divorce, illness, growth in family size, need to refinance, there are alot of things that cannot be solved by an Increase and Blend.
    In the first 5 years of the 10 year product penalty may work against you. 10 years is a long time. If you felt you absolutely had to break the mortgage in year 4 you would really wonder why you took a 10. If Variable Rate in 5 years looked like 3.95% you might kick yourself on the math. Heck, if 5 year fixed was 3.99% in 5 years you would really kick yourself.
    I know brilliant brokers who relentlessly endorse 10 – year and they may turn out to be 100% right, unless life events get in the client’s way or interest rates don’t go as planned.
    I just don’t know the answer, I lay out the factors to the clients and let them decide. It’s not a cop out, I am full of opinions on a lot of things but this one is real grey.

  5. After 5 years you can break with at most 3 months interst. It’s the law. It’s why anything over 5 years is so big. Right, Rob??

  6. “could” jump, but also “could” stay low for long, which is way more likely in the next at least 5 years … and maybe 15 :)
    I recommend picking the lower rate available (3 yr) to save most.

  7. One big problem with the mortgage is that it is not assumable. If you choosing longer terms because you think rates are going up then having as assumable mortgage might be to your advantage if one of those life events hit.

  8. Still its an incredible rate and for the next ten years not to have to worry about one’s mortgage and what interest rates and the bond market is doing would be a really nice relief. Then you can worry about other things — the kids, the car, the leaky tap in the bathroom. Never done a ten in my life but I think I mite make the leap.

  9. I always do a break even analysis for the client, so that they can make their own determination on it. And of course, tell them about the potential IRD. Have a client whose penalty dropped from $88k to $9k last month (5yrs into a 10yr).
    Currently the spread is about .7%, so basic math would say that fixed rates in 5 yrs would have to be about 4.4% or higher for the 10yr to make sense. Amortization and the fact that you are paying more principal on the 5yr upfront will skew the number downwards a bit, but some clients really feel that the 10yr makes sense because they are risk adverse.
    Remember they can always port the mortgage. As long as they don’t play on downsizing it is unlikely they will be facing a huge penalty. And you’d have to think it would be tough for rates to drop significantly from where they currently sit.

  10. Focus seems to be on rate instead of security. What programs will be gone in 5 years? Will self employed people still be able to do stated income? Will rentals be cut back again? It was a big consideration for my household-bigger than the rate- so we locked in for 10yrs. I know I’m not going anywhere in next 5, and if I want out in the last 5, my penalty is only 3 months interest instead of the IRD it could have been on a second 5yr term.

  11. How does this math compare in the context of a rental property? I am looking at buying a rental property where rent covers off the mortgage+. My realtor says lock in for the 10. Does paying the 10 year mthly on a 5 year mortgage (so more principle gets paid off) still make sense since you have a write off anyways against the rental income?

  12. Pay down all personal debt before you prepay debt used to earn income.
    As far as the term, that will depend on your financial cushion, cash flow and risk tolerance.

  13. 3.59% 10 yr fixed available as of monday, through Dominion Lending…..Gotta love it. I’m trying to get my bank to match right now. This does speak volumes about where the banks see the economy going in the long term.

  14. I have CIBC offering me a 2.84 fixed for 5 years. Should I take it? I am now on prime minus .65 for a 5 yr variable.
    A similar rate for a 10yr fixed would be awesome!!

  15. I would rather prepay more abit every month and have the flexibility to renew it after 5 years than in 10 years.

  16. “Trying to get my bank to match it right now”
    LOL. Gotta love these guys who think their bank has their best interest at heart but yet they just keep on running back to their bank. Why dont you just go to Dominion and let them do your mortgage?? Oh wait I know why….because you’re loyal to your bank because they called you and said we should renegotiate your mortgage to help you save some money as rates are very low now. Dumb.

  17. You assume too much. In this case you look like the fool.
    First off, This is my first house and first mortgage.. Second, I am building. Dominion Lending uses ATB financial to get this 10 yr rate, but they DO NOT have this offer for construction draw mortgages, where the rate is locked in for up to 9 months not just 90 or 120 days. My bank said they will match this rate and they offer it for draw mortgages. It’s not a matter of being ‘bank loyal’. It’s a matter of who can offer me WHAT I NEED.
    So, it looks like you ‘don’t know why’ after all

  18. I think the reason your bank is so aggresive with the lock-in rate is because they want you out of the 2.35% rate you’re currently enjoying. I would stick with the variable rate for now. Consider locking it in at some point during the next 1-2 years.

  19. Yes but what if rates are 5%+ in 5 years? This “flexibility” could end up costing you thousands.
    Albeit, if rates stay low (below 4.4%) you will be better off with the 5+5 plan instead of the 10.

  20. what would rates have to be at in five years to make the 10yr at 3.6 a bad move i like the peace of mind of the long term and don’t plan on moving in those 10 yrs. plus isn’t this assumable which might be a good selling feature if they do rise stupidly thanks for any advice

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