looking for help comparing two mortgages

[strider3700]

It's time for me to look into renewing my mortgage.  I've got 6 months but can start locking rates now.
I'm in Canada so no ultra cheap 30 years are possible.   For this scenario lets say I'm not going to move.  Also due to Canada's laws you can pay the 10 year  off at anytime after 5 years with a max of 3 months interest as the penalty.

The mortgage will be roughly $195,000    The current one is 3.69%

I'm trying to choose between a 5 year closed, 10 year closed and a 5 year variable.

Today rates are   
5 year closed  3.49%
10 year closed 4.39%
5 year variable 2.6%

Now I expect that that closed rates will increase.     I expect the variable to remain flat as the economy here is stalling but not forever.  Certainly not for 10 years. 

So I'm trying to figure out how best to compare the 3 options.  I wish there was a calculator that would let me compare 1 10 year vs 1 5 year at 3.49 and another at 5%

Part of me says just grab the 10 year.  It's a full 1.5% lower then my very first mortgage and for twice as long.   If they were to drop below 4% I'd say it's a done deal. but right now I'm guessing.

[garrettld]

Interesting. I had no idea that this is how mortgages work in Canada. I'm glad I have access to 30-year open mortgages.

I used bankrate.com's mortgage calculator to do the math for you. You'll have to click the lower blue button to make the amortization table appear, then look down 5 years. It's not perfect, but it works.

If I understand it correctly, then a 5-year mortgage is amortized over 25 years, and when you renew it, you'll get a smaller mortgage amortized over 20 years. Then a 15-year amortization on the next renewal, etc., getting a new rate each time you renew. Is this correct? For a 10-year mortage I assumed you'd still do a 25-year amortization.

Assuming the assumptions I made are correct, you're better off with the 5-year closed mortgage over the 10-year closed mortgage as long as interest rates don't go up significantly higher than 5%. I didn't bother with the variable 5-year -- it depends too heavily on the Canadian real estate market (which I know nothing about) for me to make any reasonable estimates of the cost. The numbers:

3.49% & 5.00%:
Payment: $975.17, $1110.66/mo
Equity after 10 years: $54,550.81
Interest Paid: $71,184.41

4.39%:
Payment: $1071.73/mo
Equity after 10 years: $53,867.84
Interest Paid: $74,740.27

The risk you're taking with the 5-year is that interest rates could go up higher than 5%, in which case the 4.39% 10-year mortgage is the cheaper option. On the other hand, if they go up to just 5%, or if they're even lower, the 5-year mortgage wins. Increased cash flow (~$96/mo) in those first 5 years could be invested, as well, helping to offset the higher payments in the subsequent 5-year period. Money now is worth more than money later.

Also, please note that I've only ever been to Canada one time for a couple hours, so there may be other factors such as tax rules regarding mortgages that I don't know anything about.

If you've got any experience with Excel, it's fairly easy to use the PMT() function to set up amortization tables that you can manipulate to math this type of thing out. Otherwise, any mortgage calculator that allows you to see the full amort table should work, even though it's not ideal.

edit: With such low rates, having the ability to pay off the 10-year after 5 years isn't really that big of a benefit. Even if you were in a position to pay it off, you'd be better off keeping the mortgage and investing your money elsewhere, getting higher returns than 4.39%.

[plainjane]

Americans always get really confused and concerned around Canadian mortgages.  I remember talking with some US banking folks several years ago and they kept on being confused why we would select a "balloon" mortgage over their very sensible 30 year version.  And then I hear all about the costs that the USians incur to break their mortgages and refinance, and I like that I've just got an automatic reset button every 5 years (yes, I'm still allowed to break etc, but it needs to be a pretty big deal in order to make it worth it). 

So to answer your question, the theory is as you state.  You get a 25 year amortization for 5 years, then a 20 year, then a 15.  Or, if after 5 years you are making more money and can afford/want to pay down the mortgage faster (through a combination of payments towards the principal or higher ongoing payments), you could start your first 5 years with a 25 year amortization, and then your next 5 years with a 10 year amortization, and then get a 1 year mortgage to finish it all off.  Also, if you are at a fixed rate and they've fallen in the meantime, another option is to keep about the same payment and shave a few years off the amortization.

OP:  My first mortgage was fixed (bad idea) and my second mortgage is variable (very good choice for me). Think about how much rates will need to rise to make up the difference between the fixed 10 year and the variable 5.  You can save/invest the difference as personal insurance against them rising too fast.  It's not just a question of %pts, it's the question of %age gain.  In the long run, the variable almost always wins (which makes sense, because in the fixed the banks are making sure they are covered).

[MorningCoffee]

I personally would not lock in for 10 years. We've always done 5 year closed, but in hindsight should have done 5 year variable.

One option is to take the 5 year rate (fixed or variable, which ever lets you sleep at night), but make your payments the same as the 10 year rate. So using garrettld's numbers, you would pay $1071.73/mo towards your mortgage, even though you only need to pay $975.17 (3.49%) or $883 (2.6% but this number will change every 6 months or so). The extra goes towards principal instead of interest, making the remaining balance smaller in 5 years when you renew. If rates stay stable, you're ahead, if they go up, it's not as painful since you've paid down more of your mortgage principal. You'd have to play with the numbers to calculate different outcomes.

[strider3700]

Thx for the info guys.

My major complaint about the online calculators is they never give enough options for prepayments and payments.  I do weekly and make a prepayment biweekly(when I get paid)  this never seems to be an option.

Does anyone have any thoughts about those HELOC mortgages?  I carry almost $15000 in cash as an emergency fund and slowly collecting for large payments like insurance.   theoretically if I put 100% of what I make against the credit line had no cash sitting and paid for 100% of purchases out of the creditline I'd be doing better.  The manulife one was like this.  It however seemed pretty crappy fee wise.

[ausername]

Did you try this mortgage calculator?  It is the most fully-featured one that I found - tons of options for prepayments and so on.

http://www.drcalculator.com/mortgage/