‘A great rate for a bad mortgage’: The 10-year mortgage is near an all-time low, but is it a good idea?
Friday, Jun. 12, 2015
The 10-year mortgage is looking slightly more attractive to many consumers as fears of an increase in long-term rates persist. Fotolia
It’s the lowest 10-year mortgage in the land but even the people offering the product tell you to stay clear.
Intellimortgage founder Rob McLister says he can get you a record-low 3.25 per cent rate locked in for 10 years as long as you borrow at least $300,000, based on funding from a financial institution he won’t identify. It’s only available in Ontario and Quebec.
“I’d say 3.25 per cent is a great rate for a bad mortgage,” said McLister. Other brokers have said the 10-year rate is closer to 3.85 per cent, while Bank of Montreal’s current 3.64 per cent rate on the same product is the lowest ever from one of the major banks on that term. “I try to steer people away. It has its use, if you are a highly-averse-to-risk type of borrower.”
Either way, the 10-year mortgage is looking slightly more attractive to many consumers as fears of an increase in long-term rates persist. A survey from the Canadian Association of Accredited Mortgage Professionals found three per cent of all buyers with a fixed rate mortgage have locked in for 10 years.
The five-year mortgage is still king among fixed rate mortgages, chosen by 51 per cent of all people. Will Dunning, chief economist with CAAMP, said the survey can be less reliable with small numbers.
“I can tell you 10-year numbers are still trivial. Why would anyone get it?” said Dunning, referring to the much higher cost of the 10-year product.
Paula Roberts, a Toronto-based mortgage broker, says five-year fixed rate mortgages are as low as 2.54 per cent — a significant discount to the 10-year mortgage.
“People call about the 10-year mortgage and then find out the price and go with five years,” she said.
One of the reasons the 10-year mortgage rate is so much higher is a government regulation that allows consumers to get out of the mortgage with only a penalty of three months interest after five years, instead of more costly interest rate differential penalties which compensate a bank for the lost interest because a consumer broke their mortgage early. Banks have to factor that rule into funding 10-year mortgages.
Moshe Mileksky, a professor at the Schulich School of Business at York University, said the 10-year mortgage offers extreme security and that’s appealing for more and more consumers in a housing market that could lose some value.
He wonders about a scenario where real estate prices drop and consumers renewing their mortgage find themselves with a loan larger than the actual value of a home based on the latest real estate market conditions.
“A question people need to ask is what happens if my home equity vanishes by the time I have to renew my mortgage,” said Milevsky. “In this environment, there are two sources of uncertainty that are really worrisome. One is real estate prices and the other one is interest rates.”
Sal Guatieri, a senior economist, said if there is a shift into longer-term mortgages, it probably reflects the fact that interest rates have nowhere to go but up.
“We generally are forecasting a gradual increase in government bond rates over the next couple of years. They will not go back to old historical norms but they will drift higher as central banks start tightening policy,” said Guatieri.
The 10-year mortgage rate has headed this low and most of the time consumers have not benefitted from locking in. McLister compared 10-year mortgage rates to five-year rates, going back to 1967, and found the 10-year rate only proved to be better about 10 per cent of the time.