BMO’s 10-Year Fixed: Not Too Shabby

If you look back over the last 40-odd years, there’s never been a time where a 10-year fixed rate has saved you more than a 5-year fixed.

A 10-year term’s rate premium over a 5-year fixed, let alone over a variable, is simply too steep…most of the time.

But this time might be different. According to our records, BMO’s 3.49% 10-year Smart Fixed mortgage is the lowest widely advertised decade-long term in bank history.*

Its rate is just 1/4 point higher than the typical big bank 5-year fixed rate. With that tight a spread, its break-even rate (versus two consecutive 5-year terms) is actually not that bad. If you chose two 5-year terms instead of BMO’s 10-year term, and you had to renew at 60+ bps higher rates in five years, you’d pay more interest overall.

Is it possible 5-year fixed rates jump 60+ bps by 2022? Unquestionably. Is it probable? If you’re adventurous enough to believe bank forecasts, yes.

Regardless of your view on future rates, however, 3.49% for ten years is a historically cheap hedge.

What About the Penalty?

One knock against 10-year terms are the hefty interest rate differential (IRD) charges you might incur if you break the mortgage in the first five years.

This is where BMO’s Smart Fixed differs. Its posted rate is quite reasonable at 4.14%. Compare that to the average 6.10% big bank posted rate.

That results in a lower IRD charge because your discount from the posted rate is less. Assuming rates didn’t drop significantly over the next five years, the most you’d likely pay to break BMO’s 10-year is three months’ interest.

And, of course, after five years you’re free to exit any decade-long mortgage for just a three-month interest penalty. That’s the law.

The Tradeoffs

BMO’s Smart Fixed is a less-frills product. That means you’ll give up the following compared to BMO’s regular 10-year fixed:

  • You can’t pay out or switch the mortgage to another lender during the first five years of the term unless you sell the property

  • You can’t get it with a readvanceable line of credit (BMO ReadiLine)

  • You can’t get it with BMO’s handy Cash Account

  • The prepayment options are just 10% annually versus BMO’s normal 20%

  • The maximum amortization is 25 years, versus 30 for BMO’s regular low-ratio mortgages.

Summing Up

BMO’s 10-year isn’t right for most people, especially if you’re financially secure and/or have a remaining amortization less than 10-15 years.

But, for someone needing absolute assurance their interest costs won’t rise over the long-term, there is currently no “safer” option in Canada. With U.S. and Canadian economies on a tear, inflation fears should drive rates higher. If that worries you, this mortgage is the longest rate insurance policy you can get at a reasonable price.

If you’re interested in one, however, you might want to apply soon. Given the recent surge in bond yields, this deal may not last long.

*  The cheapest 10-year in Canadian history was 3.24% from broker Spin Mortgage in June 2017.


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