Despite 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.”
“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
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