Should You Take a 10-Year Fixed Rate When Rates are Low?

I’ve been fielding a lot of calls lately asking about 10-year fixed rates – and with good reason! You can now get a 10-year fixed rate for around 3.04%. That’s almost at an all-time low.

But should you take this offer? NO!

Conventional thinking and human nature may lead some of us to believe this is a secure option. And, I get it. Set your payment for 10 years and you don’t have to worry about your payment going up or down. We all crave a certain degree of certainty and security.

But how secure is this? Is anyone’s life really that certain and steady? 10 years is a long time to be married to your mortgage. Does anyone really know where they’ll be in 10 years? How about in five years?

Here’s a test question: How often do people change their mortgage? Or, put another way, how often are people forced to make a change regarding their mortgage?

The answer: Every 3 years! Yup, that’s right. On average, we change our mortgage every three years. There are many reasons for this, but the most popular include health-related problems, job changes, financial troubles and family issues. The list is virtually endless. The point is that life is not a straight line. Life is like a road – sometimes there are curves, bumps, unplanned stops and even worse. Life happens!

What happens when you break your mortgage early?

If you have to make changes to, or get out of, your mortgage at any time during the first five years, then look out! Any potential savings or security you’ve accumulated will go out the window as your mortgage penalty could be massive. Count on paying penalties equal to six, 10, 12, 14 and even 16 months’ interest. We’ve routinely seen penalties in the $15,000 to $20,000 range! I’ve even seen a $50,000 penalty!

But the 10-year rate is so low!

It’s easy to let low rates suck you into a 10 year term! The gamble is that by taking a 10-year fixed rate, you’ll avoid having your renewal rate jump in five years. But what many people don’t consider is that you’ll have a higher payment for the first five years of your mortgage. On a $300,000 mortgage, that will cost you $600 more per year – around $50 a month. If applied to your mortgage, that extra $50 a month would cut your amortization by 15 months!

The perceived security of a 10-year term is obvious. The reality is, however, that this is far more likely to end up being a huge expense to you in the long run versus the savings you envision.

If you want to save, why not go variable? As a long-time variable-rate proponent, I always suggest that my clients consider a variable-rate mortgage. Variable rates may not be as good today when compared with a fixed rate, but sometimes the obvious isn’t what it appears to be. Over time, you’re more liking to save with the variable option! Speak with an experienced Mortgage Broker to get unbiased and expert advice.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca