Should you lock in to the 10-year rate?
Thursday, March 29, 2012
Canadian mortgage holders and new home buyers have enjoyed a long period of low interest rates. Those rates are now rumoured to be going to go up - perhaps not in a dramatic way, but in small increments. Naturally, homeowners with variable-rate mortgages want to know if they should lock into a fixed rate. The most common question, historically, is whether to go fixed or variable, however, the even bigger question today is whether to lock into the 10 year rate below 4%. The simple answer is: It all depends. Most homeowners choose a fixed rate because they know exactly how much principal and interest they pay on each regular mortgage payment throughout the term. However, when interest rates go down, they can't take advantage of that to save money on interest. Variable rates were the most popular choice among homeowners between the ages of 35 and 44 according to a report from Canadian Association of Accredited Mortgage Professional (CAAMP). The report said 10-year mortgages are about 1% of the marketplace. That may change as rates for the decade-long term have dropped to an all-time low, with some lenders said to be offering an interest rates below 3.99%. The much-beloved variable rate option has slumped in popularity as discounts off of the 3% prime rate have disappeared. At the same time, some financial institutions dropped rates to as low as 2.99% for terms as long as four or five years. Those promotions have now been discontinued with 5 year rates now hovering around 3.39% to 3.59% In a recent Financial Post article a few insiders weighed in. Ted Rechtshaffen, a certified financial planner, said that locking in to a 10-year rate makes sense if you think rates are going to be higher than 4.7% in five years. He thinks the odds are good that the mortgage rate in five years will be at least 5%. John S. Andrew, adjunct assistant professor at Queen's University's School of Urban & Regional Planning & School of Business also likes the 10-year rate because he believes rates will go up considerably over the next five years. However,  if a mortgage holder plans to pay down their mortgage in less than 10 years, take another term, he added. Carolann Young, a TMG agent working in Atlantic Canada says many of her clients opt for the 10-year rate. It's an area that brokers and agents need to talk more about when offering their clients the options. "We tend to put our clients in 5-year mortgages without talking about other terms," she said. "I like to make sure my clients are making an informed decision." The 10-year product is ideal for clients who are on fixed or have limited incomes or even seasonal income because it gives them stability, Young explained. "At the end of the day, you've done your job well because you gave your clients the information and they make the decision." The choice is ultimately a personal decision. The 10-year represents the ultimate in security. One key factor about the 10-year is that under Canadian law, after five years, the penalty to break the mortgage reverts to three months interest, similar to the penalty for a variable rate. That's a much lower penalty than the interest rate differential which can be in the tens of thousands of dollars. Moshe Milvesky, professor at York University, says consumers should make their decision based on on their overall financial picture. "In these extraordinary economic times, I believe that history is less relevant for the purpose of forecasting or projecting future interest rates. I believe Canadians should first and foremost take a comprehensive approach to what I like to call 'debt allocation.' The type of debt you take, its maturity, quantity and flexibility should be determined in conjunction with the rest of your personal balance sheet. Period."