You would also require amortization software that allowed you to calculate any one of the missing variables in a mortgage (3 out of 4 calculation feature). Here is the step by step procedure used.

The average price of a house in January of 2012 in Canada just reached the $348,000. A 25 year amortization period was chosen and the interest rate is 3.84%. The monthly payment was selected to be an even $1,800 thus the Principal was recalculated to be $347,904.96 (this required the 3 out of 4 calculation feature).

After 10 years of $1800 per month payments at 3.84% the total interest paid would be $114,608.

After 5 years of $1800 per month payments at 3.14% the total interest paid would be $49,931 and the balance owing is $289,836.24

So that leaves only $64,677 in interest that can be paid in the second 5 year term if the two 5 year terms are to extract the same interest as the 10 year term (114,608 – 49,931 = 64,677).

By playing the “what if” game with the 3 out of 4 feature (starting with a rate of 3.14%) the rate in the CALCULATOR was increased and the Amortization Period was recalculated until the accumulated interest in the SPREADSHEET came close to $64,677.

CONCLUSION:

If the rate for the second 5 year term is 4.85% then it is the same as if the initial mortgage was taken out for the 10 year term. If the second 5 year rate is lower than the 4.85% the borrower wins by saving more in interest costs. If the second 5 year rate is higher than 4.85% the borrower loses and ends up paying more interest than the 10 year term at 3.84%.

Looking at long term Bank of Canada rates might help you decide if a 1.71% percentage point increase is probable over a five year period (4.85 – 3.14 = 1.71).