The 10-year fixed-rate mortgage has generated renewed interest lately as borrowers look to lock in for the long term and enjoy the security and peace of mind this brings.
With mortgage rates at all-time lows, it turns out that fashion isn’t the only thing that comes back into style! In fact, 10-year fixed mortgage rates have never looked so tempting.
Following are three key reasons to consider a 10-year mortgage term:
1. After five years, you only have to pay three months’ interest to get out of the mortgage. This is currently the lowest penalty available for a fixed rate – much more attractive than facing a much higher interest rate differential (IRD) penalty!
2. If you’re on a fixed income, taking advantage of a longer term fixed-rate mortgage can definitely be beneficial. Currently, with our historically low interest rates, a five-year fixed rate is around 3.19% and 10-year is around 3.89%. So, if after five years rates have risen to 4.6% or higher (which is very likely), you would have been ahead taking the current 10-year at 3.89%. Instead of guessing how much longer rates will remain at historic lows, if you’re on a fixed income, you know you’ll be paying the same rate for 10 years.
And, chances are, after 10 years are up, you’ll be in better shape financially and have more equity in your home.
3. You don’t need the equity out of your home for your next purchase as you can buy again with a 5% down payment. For instance, if you purchase with 5% down, your property would have to go up more than 25% for you to get equity to use as a down payment for a second home, which is not likely in five years. But, you can turn your current condo into a rental and buy your next home with 5% down (with a combination of savings or a gift). Rental mortgages usually require a 20% down payment, whereas primary residences typically require just 5% down. Purchasing a condo to live in until you’re ready to buy another home, and then renting out the condo, is a great way to become a real estate investor without having to come up with a 20% down payment.
The return of the solid 10-year means you have options. It may not be the best option for everyone, and the market may change in a few months to make it less attractive. Let me show you how all the products apply to your specific situation to ensure you receive the best product and rate to meet your unique needs.
As always, if you have questions about mortgage terms, or other mortgage-related questions, I’m here to help!
Month: April 2012
Once again: Pay down your debts before rates rise
From Wednesday’s Globe and Mail
Published Tuesday, Apr. 17, 2012 7:53PM EDT
Last updated Monday, Apr. 23, 2012 10:12AM EDT
The decade’s most ignorable piece of financial advice: Pay down your debts before interest rates rise.
You’ve heard this warning a hundred times, you ignored it and rates held steady at historic lows. Now, the Bank of Canada is signalling that borrowing costs could rise if economic conditions keeps improving. Here are 10 reasons not to tune out this time around:
1. Rates will eventually rise – it’s inevitable
Financial stress now seems a permanent feature of the global economy. Will China’s economy stall? Will Europe’s debt problems worsen? Can the United States address its debt problems and get its economy going again? These are all open-ended questions that suggest there’s a chance interest rates will need to stay low for longer. Not forever, though. It could be years until stability rules, but it could also be months.
2. Borrowing means you can’t afford the stuff you’re buying
Borrowing is okay when buying houses and cars because few of us can pay cash for such large expenses. But using a line of credit to finance your lifestyle is like living on other people’s money. Exception: If you use your credit line strategically to acquire things that are paid off quickly without immediately running up your debt again. Question for you: How often are you using your line of credit? If it’s more than a few times a year, you’re likely overspending.
3. Cutting debt gives you a buzz
I paid off a five-year car loan three years early in 2011. What a high. Better than buying the car.
4. Less stress
I can tell from reader e-mails that people are stressed about debt and wondering what to do. Try taking your tax refund and using it to pay down your credit card or line of credit balance. Stop contributing to your registered retirement savings plan or tax-free savings account for one year and use the money to lower your debt. Get rid of that second-car loan.
5. Your next mortgage renewal could be scary
People who bought homes in the past couple of years have benefited from historically low mortgage rates. As recently as last month, you could get a fully discounted, five-year, fixed-rate mortgage for about 3 per cent. That compares with an average of roughly 4.5 per cent over the past decade and a high of about 5.5 per cent.
Use this Globeinvestor.com calculator to look at scenarios showing how much more your mortgage will cost if you renew at higher rates: http://tgam.ca/DKA7 (you’ll need to find out what your balance on renewal is).
And don’t tell me that future pay increases will help you afford larger mortgage payments. Big raises are scarce these days and, when you get one, you’re not going to want to see it eaten up by your mortgage.
6. Your kids need help affording university
One of my pet peeves is that parents are not saving enough in registered education savings plans. Cut debt and you have some free cash flow you can put into a regular monthly RESP contribution plan.
7. You get more control over when you retire
Reduce your debts and you can also increase your retirement savings. The more you save for retirement, the less likely it is that you’ll have to continue working in some capacity after you turn 65 to generate income.
8. You won’t retire with debt
People over the age of 45 are among the biggest debt fiends in the country. What are they thinking? That it would be fun to be on a fixed income while trying to cope with rising borrowing costs on lines of credit or mortgages? It’s hard to believe this even needs to be said, but a financially secure retirement starts with zero debt.
9. You’re covered for emergencies
People without debts are better able to afford a health or dental emergency, a basement flood, a leaky roof or a major car-repair bill. If you don’t have an emergency fund, pay off a debt and use the monthly payments you were making to build up your savings.
10. There’s no down side
No one has ever told me: “I really regret paying off my debts.” There’s always a use for the money you save, even if it’s to rack up more debt.
Last month, the federal government published a Mortgage Prepayment Code to ensure borrowers are better informed by lenders (federally regulated institutions) when it comes to situations where mortgage prepayment penalties may be charged – namely, for the purpose of clarifying interest rate differential (IRD).
IRD is a charge many borrowers face when paying off a mortgage prior to its maturity date, or by paying the mortgage principal down beyond the amount of annual allowable prepayment privilege limits. And IRD penalties can prove quite costly depending on the remaining mortgage term.
IRD is based on: 1) The amount that is being prepaid; and, 2) An interest rate that equals the difference between the original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of your mortgage.
Most closed fixed-rate mortgages have a prepayment penalty that is the higher of three months’ worth of interest or IRD.
The new code requires that lenders “provide the information in language, and present it in a manner, that is clear, simple and not misleading.”
The Code requires lenders to provide, among other things:
1. Annual Prepayment Information. This includes such things as prepayment privileges that the borrower can use to pay off their mortgage faster without having to pay a prepayment charge. Examples include making lump-sum prepayments, increasing the regular payment amount and increasing the frequency of the payment to weekly or bi-weekly. Lenders
must also inform borrowers of the dollar amount of the prepayment that the borrower can make on a yearly basis under the terms of their mortgage without having to pay a prepayment charge. As well, an explanation must be provided on how the lender calculates the prepayment charge for the borrower’s mortgage (for example, a certain number of months’ interest or IRD).
2. Information Provided When Borrower Faces a Prepayment Charge. If a prepayment charge applies and the borrower confirms to the lender that the borrower is prepaying the full or a specified partial amount owing on their mortgage, the lender will provide, among other things, a written statement to the borrower including the applicable prepayment charge and a description of how the lender calculated the prepayment charge (for example, whether the lender used a certain number of months’ interest or IRD). If the lender used IRD to calculate the prepayment charge, the lender will inform the borrower of: the outstanding amount on the mortgage; the annual interest rate on the mortgage; the comparison rate that was used for the calculation; and the term remaining on the mortgage that was used for the calculation.
3. Enhancing Borrower Awareness. To assist borrowers in better understanding the consequences of prepaying a mortgage, lenders will make available to consumers information on the following topics: differences between various types of mortgages; ways in which a borrower can pay off a mortgage faster without having to pay a prepayment charge; ways to avoid prepayment charges (for example, by porting a mortgage); how prepayment charges are calculated, with examples of the prepayment charges that would apply in specific circumstances; and actions by a borrower that may result in the borrower having to pay a prepayment charge.
Click here for full details of the code requirements from the federal finance department.
As always, if you have questions about mortgage penalties, or other mortgage-related questions, I’m here to help!