The 10-year versus 5-year mortgage: Which is better?

Mortgage debates used to centre around whether to go fixed or variable but the discussion these days is not whether to lock in a rate but for how long?

Variable rate mortgages have slumped in popularity over the last few months as discounts off of the 3% prime rate are either shrinking or disappearing. At the same time, financial institutions have dropped rates to as low as 2.99% for terms as long as four or five years.

But there is a new entrant to the marketplace — the 10-year mortgage. The Canadian Association of Accredited Mortgage Professionals says 10-year mortgages are about 1% of the marketplace but that may change as rates for the decade-long term have dropped to an all-time low with some lenders said to be offering an interest rate of 3.84%.

The choice is ultimately a personal decision and highly dependent on your risk tolerance. While variable represents the most risk, given its floating rate nature, the 10-year represents the ultimate in security coming with the heaviest insurance premium — albeit with a much lower cost these days.

One key factor about the 10-year that people forget is that under Canadian law you can only be forced to pay three months interest, after five years, to break a mortgage. That’s a much lower penalty than the interest rate differential which can be in the tens of thousands of dollars.

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Personally, I’m going to go with the five-year model. I like the 2.99% rate offered these days and even if it comes with restrictions like a 25-year amortization, you’ll end up paying your mortgage down faster.

You could face limits on prepayment terms of 10% of the mortgage per year but if you have say a $500,000 mortgage what are the odds you’ll have more than $50,000 kicking around? You only increase monthly payments by 10% but odds are that will be enough for most people.

If you do choose a 10-year mortgage, one issue to consider is how portable that mortgage is should you want to sell or move. You might also ask if it’s assumable by the buyer because if rates do go up, and you want to sell your home, a cheap mortgage could become a marketable commodity