Few borrowers actually end up taking the 10-year mortgage, but it’s known as the ‘safe’ choice – the mortgage that offers the most peace of mind in a rising interest rate environment. Holders of the 10-year fixed can sleep soundly knowing that they will be making the exact same payment every month for a decade. The more risk averse you are or the more fragile your finances, the more the 10-year term will appeal to you.
How 10-year fixed rates work
10-year fixed rates generally move in the same direction as Government of Canada 10-year bond yields, and are a reflection of the yield at the time plus the premium, or ‘spread,’ that the bank is adding to it. Spreads depend largely on financial market conditions, the creditworthiness of the borrower, and the competitive environment among lenders.
The 10-year mortgage has a few main drawbacks
- You usually pay higher interest rates than you would with a shorter term or variable rate product. Even in today’s extremely low rate environment, 10-year terms have significantly higher rates than other benchmark terms like the 3- and 5-year.
- Lenders charge a substantial risk-premium for offering long-term interest rate protection, which is partly why 6 to 10-year fixed terms account for only 7% of Canadian mortgages. Most Canadians want the lower monthly payments that short-dated fixed and variable mortgages offer.
- Longer mortgage terms can impair your flexibility: if you sell your house and discharge your mortgage before the end of your term, you’ll be subject to substantial break fees.
In the end, the 10-year fixed term is still a superb product for borrowers who simply want to lock-in and stop thinking about their mortgage for a while. And, with bond yields hovering at historic lows, 10-year fixed mortgages average below 5%!
See if the 10-year fixed term is right for you by using our comparison tools here at LowestRates.ca.