Personal Finance

Would you choose a 10 year fixed rate mortage?

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  • Jun 26th, 2012 6:00 pm
Newbie
Feb 26, 2012
18 posts
Toronto

Would you choose a 10 year fixed rate mortage?

You are a very lively and informative lot of people here on the Personal Finance forum. I have been going back and forth trying to determine my best option for financing my new condo townhouse purchase. I will be carrying a mortgage of approx $368000 after putting the 20% DP on the new property which I purchased for $459900 in downtown Toronto. I'm not a first-timer - this is actually my 3rd property and the 2nd condo I have purchased and lived in solo. My current mortgage is the ManulifeOne which I obtained in 2010 when I decided to take advantage of the equity in my condo and cover losses I incurred to help out a family member.

While I enjoyed the appearance of flexibility with ManulifeOne, I know I wasn't using the HELOC mortgage to its potential. My new property is significantly more than my current home and while I can afford to carry these higher costs (I do not maintain a credit card balance, do not own/lease a vehicle, no other loans or LOC outstanding), I was considering a HELOC mortgage product from a different lender where I would divide the balance into different fixed terms. I wanted to be able to borrow from the equity in the event I'm assessed by the condo corp for major improvements.

Now that I have been obsessively reading this forum and other similar personal finance blogs, I am concerned about interest rates and I may now want to take advantage of a 10 yr fixed term (ex. 3.89%). After closing costs have been considered, I will have approx $35000. I intend to max out my TFSA (I've got $17000 in contribution room), purchase $2000 in RRSPs (to reduce my tax payable to zero and continue to repay my LLP). The remainder will be used to furnish the new and bigger place and I anticipate I will still have a significant amout in high interest savings and add $5000 in my TFSA next year to act as a buffer in the event life throws me a curveball.

My question to you is - given my situation and knowing my intention is to utilize the TFSA, do I even need to rely on a HELOC mortgage to use as a buffer once I begin to pay down more of my principle, or attempt to protect myself from possible high interest rates and look for a 10 yr fixed rate? The old condo/new condo close in early August and I'd like to lock my financing down this week. I was waiting because the HELOC fixed mortgage rates were better if I finalized it within 30 days of closing. I'm leaning toward 10 yr fixed as of the past few days so I would need to lock this down now. Sorry for the length...I'm seeking other opinions to ensure I've thought of everything. Thanks!
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Jan 2, 2012
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The decision of variable vs fixed is a complete gamble, since really nobody will know what interest rates will be in a couple years from now, let alone 7 or 8 years.

Usually variable rate ends up being the better choice due to the upfront savings. Right now on day 1 of your mortgage, your amount owing will be the highest so this is the time you pay the most interest. If you pick variable, you are getting a big discount on the interest paid upfront. If you could save even 1% in your mortgage rate, you would save over $3500 per year in interest alone in the beginning vs the fixed rate (as long as current interest rates stay where they are). You could then put that amount into extra payments on the mortgage, reduce the principal, and get even more savings.

By the time interest rates rise to make variable rates 3.89%, your principal on the house should be lower so you will pay less interest anyways. You then have to calculate if the future savings you will get, will make up for the money and lost opportunity of that money you have already lost upfront.

Anyways as i said, its a gamble. If you think rates will start rising quickly, it may be worthwhile. However with the economy not getting much better anytime soon, and daily talk of a housing correction, will the BoC raise rates in the near future?? If a housing correction does happen and the government wants to stimulate the housing market again, could they lower rates to 2009 levels when it was 75 bp lower than today? Who knows.
Newbie
Feb 26, 2012
18 posts
Toronto
Thank you! Your answer reminded me of what my broker encouraged me to consider - taking advantage of short term fixed rates which are much lower than the 5 yr and 10 yr rates and depending on how things are going when those terms come up for renewal in 1-3 years, then consider locking in.

Since the rates I was quoted for a convention mortgage (looking at both 25 and 30 yr amo) and the HELOC mortgage are pretty similar, perhaps I can go ahead with the HELOC plan as I originally intended. I definitely plan not to "abuse" the flexibility as I did with the ManOne simply because I will have the profit from the sale of my current home. I appreciate your reply and helpful information.
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Jan 28, 2012
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I think with 10 year rates below 4% there is a very compelling case to go that route.


Its impossible to say if and when rates will go up and by how much. I think its not far flung at all to say 5 year rates will go up from the current ~3% to at least 4-5% or so in the next 5 years. How fast and how much further is really a huge guess.

In that case, a 10 year would probably be decent, as you would likely get a good 5 years at the end, where you are lower than the going 5 year rates.


I personally think that in 5 years rates are likely to be around 5-6% like they historically are. 3%/5% for 5/5 years works out better than 4% for 10 years because you pay less early on with the 5 year terms.



That aside, I think the difference is small enough, and the potential risk you avoid if the rates were to go even higher than 5%, that a 10 year makes a lot of sense to me.
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aliwanwan wrote: Thank you! Your answer reminded me of what my broker encouraged me to consider - taking advantage of short term fixed rates which are much lower than the 5 yr and 10 yr rates and depending on how things are going when those terms come up for renewal in 1-3 years, then consider locking in.
It's my opinion that this is a better move. I dont see rates going up very much, if at all, anytime soon. I may be completely wrong though, so do what you think is best!


Also its good you are ditching the Man One product. I used to have it, and found it was bad on so many levels, it's hard to recommend it for anybody. They use their own definition of "Prime" rate and don't follow the BoC rates like pretty much all other lenders do, their variable rate is actually very bad compared to other mortgages (3.5% today), and the $14 per month fee is just a petty cash grab.
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Mar 19, 2010
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rob444 wrote: I dont see rates going up very much, if at all, anytime soon.
Your opinion is based on???
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Jan 2, 2012
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angelok wrote: Your opinion is based on???
As i posted just above:
However with the economy not getting much better anytime soon, and daily talk of a housing correction
And when i say rate increases... i mean the time is takes for a considerable increase (over 100 bp). Also i said its just my personal feeling... and i could be completely wrong.
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Feb 25, 2009
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Mirabel
10 years rate seems ok, if you plan on not ever breaking the mortgage for any reason, for at least five years, or else you'll have to accept large penalty fees...
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Jul 11, 2010
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If you are looking at trying to pay it off quickly perhaps a variable is best.If the B of C rate starts to rise you have the option of locking in. Everyone was predicting that the B of C prime rate would be raised in the spring which did not happen. If Carney raises it all before the end of the year it probably would be only 1/4 %.
If you are worried that rates might shoot up quickly in the next year or two a 10 year rate would be an option. If you took a 5 year rate now it will probably be higher than 3.9% in 5 years so your payments would be higher on renewal. Another advantage is that if you ever needed to refinance in years 6 - 10 you would be paying only a 3 month interest penalty not the IRD. However, it is you that has to look at all the options with their pros and cons and then choose the mortgage that you are most comfortable with.
Doug Boswell
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Nov 21, 2004
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dcaron9999 wrote: 10 years rate seems ok, if you plan on not ever breaking the mortgage for any reason, for at least five years, or else you'll have to accept large penalty fees...
That's not necessarily true. If rates go down, then yes, there's very large penalty fees to get out of a fixed term mortgage. If rates are however up when you go to sell or refinance then your penalty is usually on 3 months interest.
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Jan 28, 2012
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BrendaK wrote: That's not necessarily true. If rates go down, then yes, there's very large penalty fees to get out of a fixed term mortgage. If rates are however up when you go to sell or refinance then your penalty is usually on 3 months interest.
Problem with a 10 year is that if you wanted to break it near the middle, they are going to compare it to the closest thing to your remaining term, like a 5 year rate, which will be lower unless 5 year rates have gone up by then.

Thats the main reason the IRD can get so high, they are always comparing it to shorter terms which have even lower rates...


after 5 years though, 10 years can only charge 3 months interest which isnt too bad.
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Jan 2, 2009
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When I looked into 10 year mortgages, I ran a few scenarios using the vertex44 mortgage calculator. I used the rate I could get on a 5 year mortgage today, and then renewing in 5 years at 5.75%, to calculate the total interest paid. I came to the conclusion that two 5-year mortgages worked out to almost the same as the 10-year because of the risk premium you are paying to the bank for the 10 year interest rate stability. Since I cannot predict that I will stay in my present house for 10 years, I went with the 2 x 5 year option.
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brian.gerson wrote: When I looked into 10 year mortgages, I ran a few scenarios using the vertex44 mortgage calculator. I used the rate I could get on a 5 year mortgage today, and then renewing in 5 years at 5.75%, to calculate the total interest paid. I came to the conclusion that two 5-year mortgages worked out to almost the same as the 10-year because of the risk premium you are paying to the bank for the 10 year interest rate stability. Since I cannot predict that I will stay in my present house for 10 years, I went with the 2 x 5 year option.
That's true. In most cases the savings you get in the first 5 years with the lower rate is much greater and easily offsets the higher rates in the second 5 year term.

As long as the rates are reasonable when you renew the second term of course. If the rates in the second term were 7, 8% + that would be quite different. Probably won't happen though. Even if it did, that would probably mean a variable is the better option for the 2nd half anyway..
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Feb 26, 2012
18 posts
Toronto
dougboswell wrote: If you are worried that rates might shoot up quickly in the next year or two a 10 year rate would be an option. If you took a 5 year rate now it will probably be higher than 3.9% in 5 years so your payments would be higher on renewal. Another advantage is that if you ever needed to refinance in years 6 - 10 you would be paying only a 3 month interest penalty not the IRD. However, it is you that has to look at all the options with their pros and cons and then choose the mortgage that you are most comfortable with.
The reason why I wanted to continue a HELOC mortgage (but with a different lender) is to avoid having to refinance or take out an unsecured LOC. The only reasons I would need access to the equity in my home (yes, I know this idea bugs a lot of folks around here) is to pay for my portion of any condo assessment that may occur or if I decide to move out of downtown then I would borrow the funds for the deposit. At my age (39), my life could change dramatically where I certainly don't want to be on the hook for breaking a 10 yr mortgage or being forced to rent it out until the end of the term to avoid paying the penalty.

If I were buying a house in the suburbs and if I was already married and birthed some children, I would strongly consider the 10 year. As I read more of your responses and consider my current lifestyle, I'm more convinced to stay with my original HELOC plan.
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brian.gerson wrote: When I looked into 10 year mortgages, I ran a few scenarios using the vertex44 mortgage calculator. I used the rate I could get on a 5 year mortgage today, and then renewing in 5 years at 5.75%, to calculate the total interest paid. I came to the conclusion that two 5-year mortgages worked out to almost the same as the 10-year because of the risk premium you are paying to the bank for the 10 year interest rate stability. Since I cannot predict that I will stay in my present house for 10 years, I went with the 2 x 5 year option.
Does the calculator take into account the lost opportunity of the savings you wouldn't get by choosing the 10-yr option?

i.e. i showed in the OPs case, the difference in variable vs 10-yr fixed could be around $3000 or more per year. So when comparing the 2 options, you should consider that savings could be re-invested (either back into the mortgage or elsewhere). Basically, savings today is worth more than savings in the future (as long as you dont blow it on useless stuff!).
aliwanwan wrote: The only reasons I would need access to the equity in my home (yes, I know this idea bugs a lot of folks around here) is to pay for my portion of any condo assessment that may occur or if I decide to move out of downtown then I would borrow the funds for the deposit. At my age (39), my life could change dramatically where I certainly don't want to be on the hook for breaking a 10 yr mortgage or being forced to rent it out until the end of the term to avoid paying the penalty.
What do you mean by "condo assessment"? If the place you are thinking of buying incredibly old? When buying the place, you will get the status certificate which your lawyer can review, and it will indicate any upcoming major renovations on the condo.

Also keep in mind most mortgages are portable. So even if you got a 10-year contract, you could sell your place and buy another... and just port the mortgage over. There shouldnt be any penalties for this (but best to ask upfront).
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Feb 26, 2012
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[quote="rob444" post_id="14949677" time="1340730768" user_id="510662"]What do you mean by "condo assessment"? If the place you are thinking of buying incredibly old? When buying the place, you will get the status certificate which your lawyer can review, and it will indicate any upcoming major renovations on the condo. QUOTE]

The term I should have used was "special assessment". No, this is a stacked townhome development that is only 12 years old. I live in a similar one now which was built one year after the development I am moving into. My lawyer gave me a full rundown once he viewed the status certificate and it's in great financial and physical health...so far. Fingers crossed it stays that way. My friend has had 2 within the last 5 years but she is in a high-rise that was built well over 20 years ago. Despite our condos being completely different, her experience spooked me so I'd like to be ready whenever the time comes.
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aliwanwan wrote: The term I should have used was "special assessment". No, this is a stacked townhome development that is only 12 years old. I live in a similar one now which was built one year after the development I am moving into. My lawyer gave me a full rundown once he viewed the status certificate and it's in great financial and physical health...so far. Fingers crossed it stays that way. My friend has had 2 within the last 5 years but she is in a high-rise that was built well over 20 years ago. Despite our condos being completely different, her experience spooked me so I'd like to be ready whenever the time comes.
I'm also in a condo townhouse now which is around 15 years old. In checking the status cert, they did a pretty througouh reserve fund study and there is a minor increase scheduled for next year... but no major renovations on the horizon.

Of course that could change in the blink of an eye with something unexpected like a major roof or plumbing breakdown, or the ceiling of the parking garage needing structural repairs or something. However even if this happened and everyone had to pay a couple hundred extra bucks per month for a while... i would be able to accomodate. You should have a bit of disposable income anyways (without going into your HELOC) to account for emergencies like this.

In my last condo (highrise), it was only 6 years old as as i was moving out, but i found out they were starting to notice a serious issue in lots of the piping going through the building, of which the original warranty had expired. So a special assessment of up to $1 Mil was going to be added. Thankfully i had already sold! These kind of things can not only be extra charges for you, but can lower your re-sale value if the maintenance fees go too high as a result.
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Feb 26, 2012
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rob444 wrote: Of course that could change in the blink of an eye with something unexpected like a major roof or plumbing breakdown, or the ceiling of the parking garage needing structural repairs or something. However even if this happened and everyone had to pay a couple hundred extra bucks per month for a while... i would be able to accomodate. You should have a bit of disposable income anyways (without going into your HELOC) to account for emergencies like this.
I will have savings that I can dip into in the event of an emergency but since I'm the type of person who likes to see a nice positive balance in the bank account, I'd rather not have to use it unless it is the better option than going into the HELOC. In my original and follow-up posts, I acknowleged that for the first few years, I won't have anything available in the HELOC anyway. My income and low expenses will allow me to carry the mortgage and live a balanced life. Won't be taking the same amount of trips I have done when I lived in the smaller condo but I know I can't afford to f**k around once I get into the bigger place. Thanks again for your comments!

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