Homebuyers have enjoyed nearly a full year of falling mortgage rates. But the tide has shifted. With inflation worries permeating financial markets, risk-sensitive borrowers are now anxious to lock in long-term.
The longest term in Canada that doesn’t have crazy-high rates is the 10-year fixed. It affords the ultimate security against escalating interest costs, ensuring your monthly payment remains unchanged for up to a full decade.
As this is being written:
- You can still get a non-default-insured 10-year fixed rate at 2.14% from Tangerine. That’s as low as it’s ever been.
- Typical discretionary (uninsured) 5-year fixed rates are approximately 1.99% to 2.04%
- The gap between these two rates is just 15 basis points, give or take. That’s historically narrow — meaning you’re paying minimal extra interest for an additional five years of rate protection.
Then again, is even that minuscule premium for 10-years worth the money?
Or would a borrower be better off taking their chances with two consecutive 5-year fixed terms?
The answer largely depends on what rate they’d have to renew at in five years.
For illustration we ran some numbers, assuming a $300,000 mortgage, 20% down payment and 25-year amortization. Here’s what we found:
| 5-year fixed | 10-year fixed | |
|---|---|---|
| Interest rates | 1.99% | 2.14% |
| Starting monthly payments | $1,269 | $1,291 |
| Balance outstanding (after first five years) | $249,883 | $252,049 |
| Total interest cost (first five years) | $27,326 | $29,492 |
| Breakeven rate Increase | 0.36%-points |
In other words, to come out ahead with a 10-year fixed, your renewal rate when the 5-year fixed matures would have to be at least 0.36 percentage points higher than your original rate.
Is that possible? You bet it is. The bond market is just about the best rate forecaster there is. As of today, "forward rates" in the bond market imply we’ll see a roughly 93-basis-point increase in 5-year fixed rates by 2026. (Forward rates are financial tools that traders use to hedge and bet on future interest rates. They're subject to error but usually outperform economist forecasts.)
Some may be thinking, "Ok, but what if I renew into a variable rate five years from now instead of another 5-year fixed?"
That would certainly narrow the gap, but likely not enough. The reason: Implied market pricing suggests at least three Bank of Canada rate hikes by 2026. If that comes to pass, it will lift prime rate to 3.20% or more. Assuming a prime – 1.00% discount on variables at the time, you’d still pay less in a 10-year fixed than with a 5-year fixed renewing into a variable.
Compare Mortgage Rates
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.
What it All Means
10-year mortgages get a lot of flak but they are no longer suckers’ bets, not at today’s rates.
If you are risk-averse, worried about inflation being underestimated and can snag one at 2.14%, a decade-long mortgage is a calculated bet worth taking.
Warning: Those breaking 10-year fixed mortgages in the first five years of the term could face crippling prepayment penalties. That is, if the mortgage isn’t from a fair-penalty lender.
And even then, the penalty could be substantial.
Fortunately, the law limits 10-year fixed penalties to just three-months' interest if broken after 60 months. And the 10-year rate leader right now (Tangerine Bank) has some of the best penalty, portability, and refinance policies in Canada. So, if you’re going to lock in till 2031, choosing Tangerine is just about the best choice you could make.
