I was fortunate to have a client recently ask me this question. Instead of simply giving the superficial explanation that is typical in our industry,: "Well, that depends on your risk tolerenance", I choose to run some REAL numbers in order to properly assess the risks involved in a 5 year term versus a 10 year term. Here's my email to my client:
"As for my opinion on 10 yr versus 5 year: Well a 10 yr pays me a lot more commission! It does give you financial certainty of that your payment will stay the same for 10 years but you are paying for it. A 5 yr rate is 3.79-3.89% (moving fast) while a 10 yr is priced at 5.4-5.6% (moving as well).
On a $200,000 mortgage, that is an interest difference of $169 per month in interest or $14,476 in interest over 5 years.
Now, if you took the payment at the 10 yr rate $1209, but took the lower 5 yr rate at 3.89% and paid more than the minimum required, you'd save $15,504 in interest in the 5 years compared to the 10 yr rate, BUT your principle balance would be at $162,607 instead of $178,108, effectively paying your principle down by an extra $15,501!!! Basically you'd be 5 years 2 months ahead of schedule in paying down your mortgage!
The risk is that when your mortgage comes due, what will rates be then? Who knows? I can't answer that, but the historical rate over the past 20 years is at 7% so you should always assume that rates will hit that at some point. If I took your maturity balance of $162,607 and used a renewal rate of 7%, your new payment would be $1263. Because you built the equity instead of paying interest, a higher rate really doesn't change much for you!
So if I was a gambling man, I'd bank on my equity and not the bank's higher 10 yr rate. I would also review my mortgage every year to see if I could afford paying even more to my principle!
I hope this helps.
Thanks for reading!
Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671