Langley Real Estate

Some hot mortgage trends this spring go against a key rule for borrowing the vast sums now required to buy a home.

The rule is this: Avoid long-term mortgage entanglements. As a general rule, longer means more expensive in terms of the interest you'll pay. Bear this in mind when considering the five- and even 10-year mortgages that are increasingly popular today, or the 30- and 35-year amortization periods that just recently became available.

The "go long" movement in mortgages is being fed by two factors, one of them being a rising trend in short-term interest rates.

As well, there's the soaring real estate market, which every month seems to make it a little more expensive to buy a home in many communities. Longer terms offer rate security to people who have stretched themselves to buy a home and fear they'll struggle financially if their payments rise.

Longer amortization periods help people get into the housing market when they maybe couldn't afford to otherwise, and they also help people get into bigger, more expensive homes than they could otherwise manage.

Ten-year mortgages are available from a wide variety of financial players, but they've never been popular. This spring, though, a few alternative lenders accessible through mortgage brokers have been offering 10-year mortgages as low as 5.35 per cent.

Industry experts said this rate is just 0.20 of a percentage point - 20 basis points in the jargon of the financial realm - over the company's best five-year rate. "We're seeing quite a number of people saying, you know what, for an extra 20 basis points how can you go wrong?"

The security factor looms large here. If you make accelerated biweekly payments (a payment every two weeks), then a 10-year mortgage could give you interest rate certainty for just about half the lifespan of your mortgage.

This, of course, assumes you use the standard 25-year amortization period for Canadian mortgages. Today, it's possible to go 30 or 35 years if you have a high-ratio mortgage (your down payment is less than 25 per cent) insured by Genworth Financial Canada. Canada Mortgage and Housing Corp., a federal agency that competes with Genworth, has a pilot program for 30-year mortgages.

These extended amortization periods give people more traction in an expensive real estate market, but the price is extremely high in terms of extra interest.

Consider a $250,000 mortgage at a rate of 5.25 per cent -- if you bumped up the amortization period to 30 years from 25 years the amount of interest you'd pay would rise to $197,037 from $163,891 (assuming accelerated biweekly payments), or about 20 per cent. The true cost is actually a bit higher because the usual insurance premium you pay CMHC or Genworth would rise by 0.20 per cent of the amount of your mortgage for a 30-year amortization and by 0.40 per cent for 35 years.

As for that low 10-year mortgage rate of 5.35 per cent, take a pass in favour of a variable-rate mortgage. A variable-rate mortgage is pegged to the prime rate at the banks, which would rise to 5.75 per cent this morning if the Bank of Canada does the expected and increases its overnight rate by one-quarter of a percentage point. The prime has already risen 1.25 points in the past year, which has lots of people running for fixed-rate mortgages.

Many economists think that the Bank of Canada is almost finished raising rates, which means the prime would stabilize and eventually move lower. Variable-rate mortgages will cut your borrowing costs as the prime falls, whereas fixed-rate mortgages of five or 10 years keep you locked in at today's rates. This is why it's smart to avoid long-term commitments.