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Choosing a 10-year term is a great option if you want stability throughout your mortgage. Although 5-year terms are the most popular in Canada, a 10-year fixed-rate mortgage provides you with peace of mind. There will be no changes to your monthly mortgage payment and interest rate for ten years.
Additionally, you will still have the flexibility to move homes by porting your mortgage. However, you'll pay a slightly higher interest rate than a 5-year term in exchange for stability. Continue reading to find out if you should get a 10-year fixed-rate mortgage.
|10-Year Fixed Mortgage|
A common misunderstanding about mortgages is the difference between your amortization and term. Amortization is the total time it takes to pay off your mortgage, while your term dictates how it's paid off. For example, your term contract will specify your interest rate, monthly mortgage payment, prepayment abilities, and more.
You will be bound to your payment structure for your mortgage term length. If you break your mortgage before your term expires, there are often significant penalties. For example, if you overpay your mortgage, you may face a penalty equivalent to three months' interest or a few thousand dollars. However, there are no penalties for moving to another home because you can bring your mortgage.
At the end of your term, you can renew your mortgage. You can renegotiate your contract, switch lenders, or ultimately pay off your mortgage without penalties during a renewal. As a result, you can think of your mortgage term as the subcontract of how you plan to pay off your mortgage. Don't forget that you are locked into this payment structure for your term length, so find a favourable lender.
For Newly Advanced, Uninsured Mortgages
Data taken from: Government of Canada Statistics
Now that you understand what a mortgage term is, the next step is to determine the right length for you. A 10-year mortgage term means you will have the same interest rate, mortgage payment, and prepayment abilities for ten years. There will be penalties for breaking this contract before ten years. However, you will have long-term predictability of your mortgage payments. You will also need to pay a slightly higher interest rate than a 5-year fixed-rate mortgage in exchange for this predictability.
In general, Canadians prefer longer term lengths when they believe the mortgage market will become unfavourable shortly. This is because they can lock in the favourable mortgage characteristics of today. For example, if you believe interest rates will rise throughout the next ten years, it's a good idea to get a 10-year mortgage. You won't have to renew your mortgage at unfavourable market rates at the end of your 5-year term.
Likewise, Canadians prefer short term lengths when they expect the mortgage market to become more favourable shortly. For example, if you expect interest rates to decrease, a 3-year fixed-rate mortgage will allow you to renew at lower market rates.
In Millions, Uninsured Mortgages
Data taken from: Government of Canada Statistics
By now, you should understand that your term dictates your mortgage payment structure throughout its length. Shorter terms provide flexibility and lower interest rates, while long terms offer stability and predictability. The most critical choice within your term contract is selecting a fixed or variable rate mortgage.
A fixed-rate mortgage means your mortgage interest rate is not affected by the Bank of Canada interest rate changes. On the contrary, your variable interest rate changes with the market interest rate. However, although your interest rate will change, your payment will stay the same.
While your payment stays the same, the variable interest rate dictates the percentage of your payment going towards interest and paying off your principal. For example, if your variable interest rate rises, less of your mortgage payment builds home equity. As a result, you will be behind your homeownership roadmap and may need to increase your mortgage payments in the next term.
Variable-rate mortgages are not offered for a 10-year term. If interest rates rise, you may be significantly behind your mortgage amortization schedule at the end of your term. As a result, you'd need to substantially increase your mortgage payments to fully own your home by the end of your lifetime amortization.
Banks prefer predictability for long term options and only offer a 10-year term as a fixed rate. Regardless of market interest rate changes, you'll be fully on track to owning your home entirely at the end of 25 years.
Your fixed mortgage rate changes with the government bond yield. A 10-year mortgage rate follows the 10-year government bond yield. As a result, your fixed mortgage rate combines the risk premium and 10-year bond yield. For example, if the bond yield is 2%, you'll pay 4% as a fixed rate on your mortgage.
The risk premium is based on your creditworthiness. If you are a high-quality borrower, you will have a lower risk premium, and your fixed rate will be closer to the bond yield—the yield changes with economic conditions.
In conclusion, a 10-year fixed-rate mortgage provides you with stability and predictability in exchange for a higher interest rate. It allows you to lock in today's mortgage rate and keep it for ten years. This is ideal if you believe the economy and mortgage rates will become unfavourable throughout your term.