5 Year vs. 10 Year Mortgages – Renewing your mortgage, what’s your game plan?

Once again the Canadian mortgage market place is changing…

Now is not the time to be lured by the lowest interest rate on your mortgage.

The debate between the 5 year fixed rate mortgage and the 10 year fixed rate mortgage has been contested online; but the reality is that each mortgage product has various strengths and weaknesses – a fact neither side can dispute.

With 5 year fixed rate mortgages ranging anywhere from 2.89 – 3.15%, the spread between the 10 year fixed mortgage and the 5 year fixed rate mortgage is a very real discussion that you and your mortgage planner should have.

The most important factor however is to have a mortgage strategy.

For home-owners renewing their mortgages in 2013, they’re faced with various mortgage offerings and multiple marketing campaigns from the big banks all competing for your dollars – but do you have a strategy in place?

A well qualified mortgage agent will take the time to sit down with you and evaluate your personal goals, financial limits and any family commitments you might have. From there, you’ll likely have a better idea of what kind of mortgage term and product fits best for you.

For an example of a mortgage strategy – let’s consider the 10 year fixed rate mortgage…

The current 10 year fixed rate mortgage product certainly offers a lot of benefits to Canadians looking to renew their mortgage in 2013. The current interest rates, ranging from 3.69% to 3.99% for most products offers historically low rates for an entire decade’s time. This low rate-long term strategy offers Canadians some excellent benefits:

• Long term predictability; you’ll know your mortgage payments for the next ten years won’t change. If you’ve budgeted or allotted $1000 per month for your mortgage, you know that number won’t change – not until 2023 at least.
• A ‘full-package’ mortgage; you’ve likely have heard about the stripped down ‘no-frills’ mortgage offers from some of the big banks. The 10 year fixed rate mortgage products in today’s markets offer the large pre-payment privileges Canadians home come to expect, along with portability options and amortization periods longer than 25 years.
• After the 5 year mark in your 10 year fixed rate mortgage, the penalty to break your mortgage is only equal to three months’ interest, this is typically a relatively reasonable amount. This clause makes it easy to re-evaluate your mortgage options in 2018.

The benefit of security & predictability makes the 10 year fixed rate mortgage product an excellent mortgage product for certain Canadians in scenarios:

• The purchase of a second property; being able to plan your mortgage payments for the next 10 years at 3.69% allows you to lay out a plan for your investment.
• Fixed or stable incomes – on a fixed income you typically look to avoid the unknown and likely cherish the value of predictability and security. You’re also provided protection from any interest rate volatility.
• Those that would like to plan against any interest rate increases in the mid-future and would generally place a premium on predictability.

Canadians looking to renew their mortgage in 2013 likely are coming off of terms with interest rates around the 5.2% mark.

An interesting mortgage strategy is to take a mortgage product like the 10 year fixed rate mortgage at 3.69% and to make payments as if you were still in a mortgage term at 5% interest. In this scenario, the mortgage strategy dictates that you keep your payments at the same amount as they were during your term at 5% interest.

By paying the same amount but at a lower interest rate – your dollars now start to work against your mortgage principal, while at the same time shaving years off of your mortgage. These are the kinds of strategies that help you to get to zero faster – and the kinds of initiatives your bank won’t suggest to you – after all it’s not in their interest to contribute to your BOTTOM LINE

In no way is the point of this post to say that the 10 year fixed rate mortgage is the perfect fit for every Canadian – but what is important is that you and your mortgage adviser analyze the benefits & drawbacks of each product/scenario and at that point determine what fits best for you.

And at the same time you’re protected from any interest rate increases – for an entire decade.

If the representative at the big bank, or at another local broker doesn’t at least offer to review the 10 year fixed rate mortgage, you should run – not walk – the other way.