Ten-year mortgages have always been a bad idea for almost everyone.
A big reason: the best 10-year fixed rates have never outperformed the best 5-year fixed rates over a 10-year period in modern history.
But suddenly, the tenners are much less bad. This is thanks to the new high percentages of credit institutions like HSBC and Marathon Mortgage. (Full disclosure: your real borrowers refer to these two lenders, among many others.)
The first, HSBC, has just announced a dazzling 10-year fixed rate of 3.24%. This is the lowest 10-year fixed rate ever advertised by a credit institution in Canada, according to RateSpy.com data.
The latter, Marathon Mortgage, deals only with intermediaries. Some of these intermediaries are buying their ten-year rates even lower than 3.24%, as long as the mortgage is insured by default. (Gergon buster: a buydown is the point at which a broker exchanges his commission to offer customers a lower interest rate).
Because 10 years are becoming cheaper
"Investors want more products than 10 years," says Harold Kennedy, CEO of Marathon Mortgage Corp, "There is more juice (profit) for them."
And it is also on a flattening yield curve. "There is no big difference between shorter and longer mortgages in terms of how much it costs us," said Barry Gollom, senior vice president of HSBC Canada. "So we can pass it on to customers."
And even the Bank of Canada likes ten-year mortgages. Just 10 days ago, Governor Stephen Poloz issued a "call to arms" to motivate the mortgage industry to sell more long-term mortgages, to reduce the risk of the financial system and the borrower.
"The governor's comment made us think about (10-year terms)," admits Gollom.
Who is not suitable for 10 years
Historically, the answer has been almost everyone.
Less than 1-in-50 borrowers get 10-year fixed mortgages, according to the Bank of Canada. And that's a reason for that.
The rate premium against a fixed five-year has long been too expensive. Until recently, it would probably have taken a steady rate increase of 150-200 basis points over a 10-year period to save more interest than two consecutive five-year terms. (A base point is 1/100 of a percentage point).
But it has changed. At current rates, the gap between conventional 10-year and five-year rates is only 30 basis points. This would require rates to be just 75 basis points higher in 2024 for a 10-year period set to beat a five-year fixed rate.
That kind of increase is probably unlikely given the current market outlook, but ask any concern about inflation and they will tell you that a three-quarter rate increase is easily in the realm of possibilities.
Don't forget the non-tariff factors
With mortgages, it's never just about the cost of interest. Restrictive terms in your mortgage contract can cost you much more than saving you from most "special rates".
One way a 10-year fixed can bite you is if you break your mortgage too soon. Once you reach the five-year limit on a fixed mortgage, it's not a big deal. The maximum penalty allowed by law is only three months of interest in that case. But if you break a 10-year deadline before five years, the prepayment penalties with most lenders can be huge.
For this reason, if there is a possibility that you will pay your mortgage in the first 60 months, do not even think about a decade.
And if there is a possibility to move or increase the mortgage at that time, make sure you are 100% sure that you are dealing with a lender who:
· Publicizes highly competitive rates
· Offers good portability to a new property, e
· Allows you to increase the loan without any penalty (for example, without extra penalty and without penalties incorporated in the new rate).
If you follow these guidelines, you are less likely to be overloaded if you have to borrow more money before the mortgage matures.
Do you know those people who build underground fire shelters in case Trump and Putin go nuclear? Well, a decade has traditionally been the fallout shelter, something that would protect you in the highly unlikely event of catastrophic inflation.
It is essentially an insurance policy. And some people are more than happy to pay for predictability. "We call it the mortgage of good night sleep," says Gollom.
In fact, for those very risk-averse people who don't want to think about their funding until 2029, now it's probably the least bad in history to consider a ten-year mortgage.
On the other hand, "If the point of view is that rates are going to go down and you have a chance of overcoming a rate increase then (at a fixed 10-year rate) it probably isn't right for you," adds Gollom.
In any case, don't forget to have the precious opportunity to escape from your credit institution after five years just for a three-month interest charge. This allows you to take advantage of lower rates in 60 months, if we get them, by overcoming the 10-year refinancing in advance and refinancing it.
10 year terms could become more popular
If the spread between 10-year and 5-year rates remains so tight, we will see a significant increase in 10-year fixed demand. Heck, even the "stress test" mortgage could drive that question. In his company, Mr. Kennedy says, "There has never been a time before this, where someone could qualify at the same pace over a 5 year and 10 year period."
This qualification rate, as they call it, is currently 5.34%. Regardless of whether you get the 10-year fixed rate or the 10-year fixed rate lower than today, you must show the creditor that you can afford a higher payment based on this percentage of 5.34%. Until recently, it was more difficult to pass the stress test into a 10-year mortgage because they had much higher rates.
Some credit institutions speculate that the government can permanently eliminate the new stress test in 10-year terms, as the Bank of Canada promotes long-term rates and because there is much less rate risk on a 10-year target. This means that borrowers should only demonstrate that they can afford their actual "contact" rate, not a rate that exceeds 200 basis points. In turn, they could get bigger mortgages.
If this happens, Jim-bob will take care of the doors. The demand for ten-year loans could increase.
Robert McLister is a founder of RateSpy.com is intelliMortgage. You can follow him on Twitter at @RateSpy
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