Robert McLister, Canadian Mortgage Trends editor, wrote a great article in the Globe and Mail on May 3rd, about the importance of evaluating not only the interest rate when choosing a mortgage, but more importantly the mortgage term. He points out that mortgage terms are "…often overshadowed by the intense focus on mortgage rates". How much interest you will ultimately pay over to the lender is ultimately determined by your term selection. There are two main groups of mortgage terms; long-term rates (for example, four, five, seven or ten year fixed terms), and short-term rates, including variable, one, two or three year fixed terms. Choosing between these terms is not about rate prediction, but more importantly identifying the potential risks and how they could affect you and your family. Be sure to have an honest and accurate outlook on your financial security and potential future changes in your finances.
McLister provides a valuable list of benefits and how each mortgage term could make sense for you. See below for his recommendations:
"A long term mortgage makes sense if:
- A 25- to 30-per-cent-plus payment increase would cause you financial stress. (That’s the payment hike that a short-term borrower might face if rates rise as economists project.)
- Your “emergency fund” covers less than six months of living expenses
- You have minimal equity and net worth
- There’s a chance your earnings could drop due to job instability, a highly variable income, upcoming retirement, an educational leave, an extended care leave, etc.
- You’re heavily invested in long-term fixed income, which creates more risk to your “personal balance sheet” if you’ve also got a short mortgage term and rates surge
- You want greater certainty when projecting cash flow on an income property
A short-term mortgage may be the way to go if:
- You expect to pay off large chunks of your mortgage or sell your home within the next three years
- You have a short remaining amortization (e.g. 5-6 years or less)
- Your credit is subpar and you need a non-prime mortgage just long enough to rehabilitate your credit so you can qualify with a prime lender
- You need to refinance in coming years to access your equity for a life event, education, investment purposes, business use, etc
- You strongly believe that rates won’t rise in any meaningful way over the next 12 months, you can afford to be wrong, you’ve found a short-term rate that’s far lower than long-term rates, and you can make higher-than-required payments. "
At the end of the day the most important factor is deciding what mortgage term is right for you and considering the potential impact each choice could have on your life and finances. Be sure to sit down with an experienced lender who can explain and provide you with a valuable and honest assessment of what each mortgage could potentially look like for you.
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