Home: Longer term fixed rate mortgages offer some intriguing benefits

The Bank of Montreal made news this week with its interest rate offering of 2.99 per cent for a five-year fixed rate mortgage.

  • Mar. 16, 2013 5:00 p.m.

In the midst of the current mortgage rate competition, the Bank of Montreal made news this week with its interest rate offering of 2.99 per cent for a five-year fixed rate mortgage.

However, the reality is most mortgage brokers have been securing mortgage deals on rates below three per cent for several months now, and even more attractive rates on seven- and 10-year mortgage deals.

What does that mean for you?  As has been said often in the past months, mortgage rates will go up—it’s just a matter of when.

The five-year fixed mortgage interest rate is at 2.89 per cent and the 10-year fixed rate 3.69%. In between,  we have the seven year rate at 3.49 per cent.

Historically, shorter terms and the lower probability of dramatic rates increases were two common arguments against choosing a 10- year mortgage.

These arguments were somewhat weakened with the launch of the record-low 10-year fixed rate of 3.69 per cent.

When it comes to choosing a mortgage term, there is always a fixation on the rate. Typically, people tend more to shorter terms for marginal savings.

While the 10-year rate being offered today is far below average, if you think rates are likely to rise and move back into a more normal range, then choosing a shorter term today may be looked back on as a missed opportunity.

Break-even analysis shows that for the 10-year fixed mortgage to be a better deal than the five-year option, interest rates must rise over 1.60 per cent in the next 60 months.

There are other factors to consider when choosing a 10-year mortgage. If you were to pay the mortgage off during the first five years, the penalty could be a negative factor.

Most closed fixed-rate mortgages have a prepayment penalty that is the greater of three months interest or the IRD (interest rate differential).  The IRD is based on the amount you are prepaying  and an interest rate that equals the difference between your original rate and the interest rate the lender can charge today when relending the funds for the remaining term of the mortgage.

Each lender has its own formula for calculating penalties, so you want to have a clear understanding how this might apply specifically to your mortgage.

The great thing about a 10 year term is the lenders are limited to charging only a three month interest penalty for the first five years.

Another option to avoid an interest penalty with a 10-year mortgage is if you have decided to purchase another home, most lenders will allow you to port the mortgage to the new property.

Current interest rates at that time will apply to a port mortgage, while a decrease in the mortgage will require a penalty payment only on the decreased difference.

Of Prime Interest is a collaboration of mortgage professionals Trish Balaberde (250-470-8324), Darwyn Sloat (250-718-4117) and Kristin Rosdal (250-878-3007).


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