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Is a 10 year term right for you?

1. If you have a small down payment, you have a big mortgage: A 10-year term protects you from rising interest rates for twice the length of time as a five-year term. During the first five years of a high-ratio mortgage, most of the payments have traditionally gone towards interest. It's a better balance now, but if at the end of five years you’ve paid very little principal and rates are higher, you may not have much room to increase the amortization and maintain the same payment. A 10-year term offers that much more breathing room.

2. Peace of mind: A 10-year term makes household financial planning and budgeting that much easier. This is particularly true for real estate investors who want to take the risk out of financing and budget cash flows.

3. Smaller penalties: Many people avoid the 10-year mortgage because they don’t want to be locked in for such a long period of time. They are also afraid of the size of the penalty if they break it. But, you will actually pay a smaller penalty for breaking a 10-year mortgage in some cases, than if you break a five-year mortgage part way through. After the five-year mark in a 10-year term, you will only have to pay three months interest to break your mortgage per Canadian legislation.
Breaking a fixed mortgage with terms of five years or less is subject to an Interest Rate Differential (IRD) penalty which is typically much higher

4. Less long run interest: You could end up paying less interest in a 10-year mortgage than with two consecutive five-year terms, if rates rise. Although you pay more in the first five years with a 10-year rate than a five-year rate, you could save in the second half of your 10-year term.

Given that rates are at historic lows, they have nowhere to go but up, though how far and when is unknown. What is certain is that mortgage rates would have to remain below long-term averages for two consecutive five-year terms to win out.

Of course, your circumstances can change over time. So make sure that whatever term you choose your mortgage is transferable from one house to another. The 10-year mortgage deserves a closer look. After all, deals like this do not come along every day.

For more information and a list of current rates, go to www.bemortgagefree.ca.

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Paul Smith
Mortgage Agent
Mortgage Intelligence
Lic# M09000464
P - 905-691-6796
E - paul@bemortgagefree.ca
W - www.bemortgagefree.ca

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Nice post.....

I like the 10 yr peace of mind for young 1st time buyers who are getting married, having kids, taking mat leave, paying for daycare.....with all of these costs to budget for and consder isn't it nice to know exactly what your mortgage payment will be? That you don't have to have the added stress of renewing into a potentially higher rate/higher payment with a shorter term renewal?

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Christina Jackson
Mobile Mortgage Specialist
TD Canada Trust
T: 647 292 7597
F: 905 377 1634
P: 866 767 5446
email: christina.jackson@td.com