When our mortgage came up for renewal about a year ago, my husband and I did what many couples do and debated whether to go variable or fixed. What we never seriously considered was locking in to a fixed rate for a decade – that option wasn't even on the table.
What a difference a year makes.
A surge of interest in the 10-year mortgage has dramatically altered the home-owner mortgage debate, which has traditionally been a choice between two five-year products – the fixed and variable, says mortgage broker Vince Gaetano of MonsterMortgage.ca. "The reality is that consumers are now smarter and have more foresight. There is considerable understanding that we are at the bottom of the rate cycle."
He says inquiries about the 10-year fixed mortgage rate picked up in January, when it first dipped below 4 per cent.
Now, he is seeing a "record" amount of interest in this product. "Nearly 60 per cent of our clients are currently choosing it, compared with around 5 per cent in previous years," Mr. Gaetano says.
Although interest rates are expected to remain at their current low for the next several months, the Bank of Canada has indicated that a hike is on the horizon. And with Canadian households saddled with record debt, Bank of Canada Governor Mark Carney has repeatedly expressed concern about how people will be able to make their payments once borrowing costs rise.
The 10-year mortgage is "of considerable interest to people who are carrying a high debt load," Mr. Gaetano says. The certainty of knowing that that their mortgage rate is secure for the next 10 years is most appealing to them, he added. In his 22 years in the mortgage business, he has never seen the 10-year mortgage rate below 4.5 per cent. "This is a tremendous opportunity."
Robert McLister, the editor of the Canadian Mortgage Trends blog, says the spread between five and 10-year mortgage rates is as tight as he can recall. "The premium you are paying to know what your rate is going to be for 10 years is exceptionally reasonable on a historical basis."
As of late last week, people with good credit could secure a 10-year fixed mortgage for roughly 3.85 per cent to 3.89 per cent. But there are indications that at least some lenders are feeling the squeeze of the ulta-low rates and could soon pull back.
Mr. Gaetano has in the past been a vocal supporter of the variable-rate mortgage. Not any more. "The reality is that that train has left the station. It is a dinosaur. Unless we see discounted variables like what we used to see at prime minus 80 [8/10ths of a per cent] there is no good reason to consider the variable."
He believes home owners considering a four- or five-year fixed mortgage should be careful about setting themselves up for renewing at higher rates in 2016 and 2017, when he expects mortgage rates will be 60 to 70 per cent higher. "I think people are fully aware that their income is not going to be rising by that much," he says.
Mr. Gaetano is concerned that people are not sufficiently prepared for what a rise in interest rates will mean to their mortgage payments. "With rates this low, any increment will be a dramatic increase from what they are paying today and it will be a shock."
York University finance professor Moshe Milevsky says the longer the amortization of your mortgage and the time period over which you plan to make mortgage payments, the more attractive the 10-year rate looks when compared to the 5-year fixed.
His advice? "If you want to go with the 10-year, try your best to scrimp and save to shorten the amortization period."