Choosing the mortgage term that’s right for you can be challenging for even the savviest of homebuyers, as terms typically range from six months up to 10 years.
By understanding mortgage terms, you can save the most money and choose the term that’s best suited to your specific needs.
The first consideration when comparing various mortgage terms is to understand that a longer term generally means a higher corresponding interest rate. And, conversely, a shorter term generally means a lower corresponding interest rate.
While this generalization may lead you to believe that a shorter term is always the preferred option, this isn’t always the case. Sometimes there are other factors – either in the financial markets or in your own life – that you’ll also have to take into consideration when selecting the length of your mortgage term.
There are cases for both short- and long-term rates
If paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to opt for a longer mortgage term, such as five or 10 years, so that you can ensure that you’ll be able to afford your mortgage payments should interest rates increase.
By the end of a five- or 10-year mortgage term, most homeowners are in a better financial situation, have a lower outstanding principal balance and, should interest rates have risen throughout the course of your term, you’ll be able to afford higher mortgage payments.
If you’re shopping for a mortgage for an investment property, you’ll likely want to consider choosing a longer mortgage term – depending, of course, on your overall plan. This will allow you to know that the mortgage payments on the property will be steady for a long time and enable you to more accurately project your future income from the property.
On the other hand, if you know you won’t be staying in the same home for the next five or 10 years, opting for a shorter term can save you significant fees when it comes to early payout penalties.
While a five-year term is the most popular choice for Canadians, that doesn’t mean it’s the smart option for all borrowers.
Choosing the right mortgage term is a unique decision for everyone. By understanding your short- and long-term goals, as well as your personal financial situation and tolerance for risk, your mortgage agent can assist you in choosing the mortgage term that will work best for you every time.
Have questions about mortgage term options? Answers are a call or email away!