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PostPosted: Wed May 02, 2012 12:57 pm 
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With 10 year mortgage terms now available for as low as 3.89%, they are now starting to catch the attention of many mortgage seekers. But is taking out a mortgage for 10 years a good idea? The answer is yes and no. I really depends on the person borrowing the money. For some, it will make sense, but for most it won't.

One thing is for certain....mortgage rates won't always be this low. We know they are going to go up as the economy improves. In a healthy economy, 5 year fixed mortgage rates commonly fall between 5-6%. Will someone save more money over a 10 year period if they take out a 10 year mortgage? While anything can happen, it is a reasonably safe expectation that 5 year fixed mortgage rates will be higher in 5 years than they are today. IF you stick with the 10 year mortgage for the entire 10 years, than the answer is yes, you will most likely save more money over that period in a typical situation. But that is a very big 'IF', as 10 years is a long time, and we really don't know what our situation is going to be like down the road.

Many people refinance their mortgage about 3 - 4 years into it, breaking their 5 year term early. Why do they do this? It could be to get a lower mortgage rate (unlikely in the future, as we are already rock bottom on rates). It could be to withdraw money from the equity in their home for whatever reason, which is probably the most common reason for refinancing. Maybe you choose to move and refinance at that time (although, MOST mortgages are portable and you can move your mortgage to your new home).

My point is that the future is not set, and we cannot predict it. Maybe 4 years from now you decide to start a new business and need to borrow money against your home? Or you decide to go back to school? Or you need money for medical purposes not covered by insurance? Maybe your employment gets transfered to another province or country and your mortgage can't be ported? My point is, there are numerous curves life can throw at you that are unexpected. After all, if homeowners thought they would need to refinance in 3-4 years, then they wouldn't have taken a 5 year mortgage to begin with.

Life has unexpected changes. I am not 'against' 10 year mortgages, but just make sure your mortgage broker or mortgage banker takes the time to explain the pitfalls, and doesn't just drop you into the mortgage term that makes them the most money (10 years).

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PostPosted: Fri May 04, 2012 6:19 am 
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Hi Andrew, thanks for the input. Not hijacking at all! My goal with this post is to help people become more aware of what they are getting into before agreeing, as I believe many professionals won't take the time to adequately explain it.

You bring up some great points, which I am glad you did. Yes, with the 10 year there is no IRD (Interest Rate Differential) after 5 years and penalty is only three months. I also agree that rates will be higher than 4.6% after the 5 year mark. I did say that the 10 year mortgage can be a good idea, but if you break it early it will end up costing you more in the long run. You have to go the distance to make it work.

For example, let's say the two options right now are a 5 year fixed at 3.19% (there are lower available, but we'll use 3.19). At the 5 year mark, the 10 year fixed would have cost the borrower an extra $10,517.43, than if he had taken out the 5 year fixed at 3.19% (based on a $300,000 mortgage/25 year amortization). So that is over $10K that the borrower would have had to make up in the 5 - 10 year stretch with a 10 year fixed. If they find themselves in an unexpected situation where they have to break at the 5 year mark let's say.. they just paid all that extra money to the bank unnecessarily, which would make breaking it quite costly.

My point was that many people end up refinancing between 3-4 years into their mortgage, yet they still took out a 5 year term. They wouldn't have if they knew they were going to break the mortgage in the first place. That is just a 5 year term, yet alone 10. Unless of course, the bank or broker didn't take the time or care to give them any other options other than the 5 year fixed, which is entirely possible, as many don't offer the service level that you and I do.

Hope this helps people to better understand the situation before signing a 10 year term. I am not saying that they are bad, just understand that 10 years is a long time, and situations can change. Breaking it early can be costly.

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Paul Meredith
Mortgage Broker
CityCan Financial (est 1976)
416-409-8009
http://www.easy123mortgage.ca
paulm@citycan.com
Lic#10532

Follow me on Twitter! http://www.twitter.com/paulmeredith


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PostPosted: Mon May 07, 2012 11:06 pm 
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Hey gents...good perspective from both.

Another thought is that if one was to take the lower rate now, he would not have to automatically sign for a new 5 year fix at renewal...if 5 year fix were too high then i would likely encourage clients to get in shorter terms or VRM. From 2003 to 2008 the average prime rate was right around 5% so with discounts between .65%-1%, people were still averaging in the low to mid 4's.

cheers,
Mat

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Mathieu Fugere
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PostPosted: Tue May 08, 2012 8:44 am 
Do mortgage agents make more money if you sign up someone to a 10 year mortgage as opposed to a 3-5 year one?


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PostPosted: Tue May 08, 2012 8:57 am 
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yep...

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PostPosted: Tue May 08, 2012 11:43 am 
Hmmmmm....perhaps that explains why many agents are pushing the 10 year mortgage? Just an observation! :)


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PostPosted: Wed May 09, 2012 8:41 pm 
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csb101 wrote:
Hmmmmm....perhaps that explains why many agents are pushing the 10 year mortgage? Just an observation! :)


They can be good for some people. Just make sure the mortgage agent or mortgage specialist at the bank takes the time to properly explain the pitfalls, and provides you with concrete numbers as I have done in my example above. They should compare it with other options for you and help you to make the decision that will be best suited to your needs, not theirs.

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Mortgage Broker
CityCan Financial (est 1976)
416-409-8009
http://www.easy123mortgage.ca
paulm@citycan.com
Lic#10532

Follow me on Twitter! http://www.twitter.com/paulmeredith


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PostPosted: Wed May 09, 2012 8:55 pm 
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Great points, Paul. I don't think I'd recommend 10-year mortgages to my friends or family members either no matter how appetizing they sound.

csb101 wrote:
Hmmmmm....perhaps that explains why many agents are pushing the 10 year mortgage? Just an observation! :)


There's nothing wrong with people wanting to make money, as long as they do it ethically and provide value. Most professions, yours not included, don't get 2 paid months off nor have guaranteed pensions, so we always have to make money when we can. :twisted:

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PostPosted: Tue Feb 26, 2013 11:30 am 
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About a year ago, 10 year mortgages dipped below the 4% mark, which led many to jump towards 10 year mortgages. As mortgage agents and brokers, we get paid more for selling these mortgages, so if you are considering a 10 year mortgage, make sure your broker or mortgage banker lays all the numbers out for you so you can make an accurate decision and never just go on a 'recommendation' without getting all the facts.

For example, let's say you are considering a 10 year fixed mortgage at 3.89% vs. a 5 year fixed at today's lowest rate of 2.84%. At the end of the first 5 years, you will already be $15,647.75 ahead with the 5 year mortgage than with the 10 year (assuming monthly payments and a 25 year amortization with no extra payments made).

The break even rate in the above situation is 5.41%. This means, for you to come out ahead with the 10 year mortgage, the 5 year fixed rate at the end of the first 5 years would have to be higher than 5.41%. If it is lower than that, then you lose. That is a pretty big gamble. If you end up breaking your mortgage at the 5 year mark (most don't even make it that far), then the 10 year mortgage just cost you over $15K PLUS your penalty to break the mortgage.

While 5 year fixed mortgages very well may be higher in 5 years than the are now, I wouldn't expect them to start skyrocketing anytime soon. Given the state of the global economy, it is going to take years before we climb out of this mess. The situation in Europe isn't getting any better, an Europe is just taking the focus off of the United States, who are in equally in bad shape. Could 5 year fixed rates be higher than 5.41% at the end of 5 years? Anything can happen. If they are, then there may be other attractive options open to us at that time as well. Perhaps variable rates will start looking better again (they are already improving with rates as low as prime -0.50%), or even shorter term mortgages may be an option as well. Time will tell, but a 10 year mortgage would be quite a big gamble. You 'may' win, but you would have to stay in for the full 10 years to get any benefit, and that alone is a big gamble.

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Paul Meredith
Mortgage Broker
CityCan Financial (est 1976)
416-409-8009
http://www.easy123mortgage.ca
paulm@citycan.com
Lic#10532

Follow me on Twitter! http://www.twitter.com/paulmeredith


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