5 year fixed mortgage

5 Year Versus 10 Year Fixed Mortgage

Just when I think mortgage rates won't get any lower, they drop. With real estate sales volume slowing down across Canada and lots of bad economic news globally, mortgage rates have hit an all time low for 5 year fixed and 10 year fixed mortgages.  The battle of 5 year versus 10 year fixed mortgage is back!

5 Or 10 Year Fixed Mortgage

How do you choose which product makes sense?  Per Bank of Canada, average 5 year posted rate for the last 10 years is 6%.  It wasn't too long ago, in 2007 and 2008 5 year discounted mortgages were at 5.79%-5.99%.

Let's look at data to analyze which option makes sense by calculating the break even mortgage rate:

  • Mortgage balance: $350,000
  • Mortgage Amortization: 25 years
  • Compare 5 year fixed mortgage at 2.89% versus 10 year fixed at 3.69%

 5 year fixed mortgage versus 10 year fixed mortgage - Nawar Naji Toronto Mortgage Broker

What the abort chart shows is if one selects a 10 year fixed mortgage, sets the payment and forgets about it for a 10 year period versus choosing 2 5 year fixed mortgage terms, the breakeven mortgage rate is 4.49%.  If one believes that mortgage rates will be higher than 4.49% in 5 years from now, the 10 year fixed mortgage option makes more sense, or if one believes that rates will be lower than 4.49% in 5 years from now, the 2 5 year fixed mortgage terms option makes more sense.

BUT, as a mortgage professional, my clients don't get away with setting the mortgage and forgetting about it. Utilizing the inflation hedge mortgage strategy, pro-actively managing the mortgage and adjusting the payments for inflation, the breakeven mortgage rate drops to 4.35%. The inflation hedge mortgage strategy protects the homeowner from payment shock when renewing at higher mortgage rates and reduces mortgage amortization by achieving mortgage freedom earlier.

Understanding historical interest rates data and the breakeven mortgage analysis, the decision of choosing 5 year fixed mortgage or 10 year fixed mortgage should be an easier one.

Disclosure

  • The breakeven mortgage rate will vary depending on mortgage amount and amortization.
  • Above mortgage products are fully portable, assumable and have 20% pre-payment and 20% increased payment privileges built into them.
  • Above mortgage products can be ported to a new property and mortgage amount can increased which is known as port, increase & blend in the mortgage broker world. This is important feature since it would be a bad mistake to break these low rate mortgages in the next 3-5 years if one decides to move.
  • 10 year fixed mortgage penalty the day after 5 year anniversary is 3 month interest (not interest rate differential) per Interest Act.

To run your personal mortgage breakeven analysis, please contact Nawar.

Buying A Home? Home Buyers Videos Guide - Nawar Naji Toronto Mortgage Broker

Business Owners Mortgage

With round 4 of the mortgage rules taking effect on November 1, 2012, mortgage qualification for business owners got tougher.  Don't despair, since there is still hope for a business owner to get their last mortgage....ever.As you are aware, the new mortgage rules reduce the maximum mortgage to 65% of home value for business owners who use a stated income (income that is not verified by Canada Revenue Agency documents). However, as previously explained in a blog post regarding business owners mortgage options, a mortgage up to 90% for a purchase or 80% for a refinance can be obtained.

Business Owners Mortgage....The Last One

Many homeowners choose a 5 year mortgage term over other terms, however in today's economy the difference between 5 year and 10 year fixed mortgage has never been this small (2.99% vs 3.79% at the time of writing this blog post).  The 10 year fixed mortgage provides the following to a business owner:

  • Stability and security of fixed cost of borrowing over a 10 year period
  • Not worrying about qualifying for a mortgage in 5 years time frame and providing pages and pages of financial statements
  • Protection from rising interest at renewal time
  • Freedom to focus on growing the business, being profitable and tax reduction strategies

The chart below compares 2 options for a $350,000 mortgage: 2 5 year fixed mortgage terms and a 10 year fixed mortgage term

2 5 year fixed mortgage terms vs 10 year fixed mortgage term

To summarize, the above chart shows if one believes mortgage interest rates in early 2018 will be higher than 4.75%, the 10 year fixed mortgage is a viable option. As difficult as it is to predict where mortgage rates will be in the future, why would anyone want to renew at higher than 3.79%-3.89% interest rate in 5 years time?

This mortgage option powered by the inflation hedge mortgage strategy (explained in this video) provide a solid plan to achieve mortgage freedom.

To discuss your mortgage options whether you are buying a home, an investment property or renewing your mortgage, please contact me.

Home Buyers Videos Guide