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10 Year Rate vs. 5 Year Rate: Which one should you choose?

Mike De Sousa

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!

Mike De Sousa and Mindy Small

Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671