What’s this? The guy who just sold his house is giving mortgage advice? And is recommending a 10 year mortgage? Why, this is outrageous! This is worse than Michael Jackson giving kids directions to his ranch. This is worse than OJ Simpson giving tips on getting away with murder. This is worse than some dumbass unfunny blogger making pop culture references from 20 years ago, since apparently he’s been living in a cave since 1994.
Jeez, the author of this blog is a dick. Why are you all even still here? (Looks around, sees no one.) Oh.
More Uproar for your eyeballs: The Ultimate Canadian Mortgage Guide
Traditionally, a variable rate mortgage has been your best bet. Usually they can be obtained for a discount to the bank’s prime rate. These days, a well qualified borrower can get a 5 year variable mortgage for prime minus .30-.40%, or 2.60-2.70%, if that’s how you prefer to look at your numbers. Typically, a borrower pays 1% to 1.5% more for the stability of a 5 year fixed rate mortgage. Most of the time interest rates won’t move enough during a term to make up for that higher rate paid in the first place.
Even though fixed rate borrowers end up paying more than their variable rated badass brethren, a whole bunch of Canadians end up going with a 5 year fixed mortgage instead. Why? Because Canadians are dumb. More of them should read this blog. FINANCIAL UPROAR, MANDATORY READING IN SCHOOLS SINCE 2013.
Fast forward to 2014. “Geez, test scores are way down this year? I wonder why?” (Farts, everyone giggles, no actual teaching gets done)
People are happy to pay a premium mortgage rate just to ensure it won’t go up. It’s a type of insurance which can add up to thousands of extra dollars paid out in interest. Most of the time, going with a 5 year fixed mortgage is a bad idea. But what about now, during some of the lowest interest rates in history? Wouldn’t locking in be a good idea, considering the upside risk that most definitely exists? Maybe, but I have another strategy.
Go long. Get a 10 year mortgage.
I just checked rates, using this new invention called The Google. It seems good for finding porn, but let’s not talk about that. You’re looking at approximately 3.5% on a 5 year fixed mortgage, along with 2.6% on a 5 year variable. Meanwhile, ScotiaBank is offering a nice 10 year fixed mortgage at 3.99%. The 0.5% spread between a 5 year fixed and a 10 year mortgage makes the 10 year an easy choice, but what about compared to a 5 year variable?
Doing a simple calculation, your 5 year variable would have to rise up to 5.4% during the second half of the 10 years in order for each mortgage option to be equal. (Again, simple calculation. I realize there are flaws in it, but I am extremely lazy.) Will that happen? You’re looking at basically a doubling of today’s prime rate of 3% for that to be the case in 2018. It could happen, especially if the Bank of Canada starts increasing interest rates next year.
While you could make the argument that you’d be better off taking two 5 year variables over a 10 year fixed, there is no case to be made taking the 5 year fixed over the 10 year fixed. I’m saying fixed so much you’d think I spayed/neutered animals AND repaired computers.Fixed fixed fixed FIXED BITCHES.
If you take out a 10 year mortgage now, you’re going to have 5 years left on the thing at 3.99%. There is little doubt in my mind interest rates will be higher then. You’ll be looking like the king of swing with such a low mortgage rate. The ladies will grovel at your feet, only stopping to go on their knees for some reason. The fellas will give you sly winks and maybe a thumbs up, because the fellas you hang out with are kinda weird. Cats will continue to be indifferent to you, because THERE IS NOTHING YOU CAN DO TO PLEASE THOSE ANIMALS.
Another reason 10 year mortgages kick ass is you can always punt it after 5 years and get a new one. But wait, you say, wouldn’t I have to pay a giant ass penalty? Au contraire, my friend. There’s a secret that you should know about, one way cooler than that time you thought you were so smart because you figured out two personal finance bloggers were dating even though they left eleventy billion clues.
All Canadian mortgages can be broken with a minimal 3 month interest penalty after the 5 year mark. It doesn’t matter if the term is 7 or 10 or 25 years, the 3 month interest penalty applies. So if it turns out you’re gonna pay an inflated interest rate for years 5-10 on your mortgage, getting out isn’t so expensive.
With the spread tightening up between a 5 year and 10 year mortgage, I’d take the 10 year fixed over the 5 year today. Variable is another story, but the choice is pretty clear when it comes to fixed rates.