Your mortgage term is fundamentally about relationships, both long and short. As with all liaisons, the choice will always depend on individual motives. Although mortgage interest rates seem to receive the highest contemplation concerning home financing products, mortgage terms also manipulate your savings. Appreciating that both are connected is crucial. Before committing to either a long-term or short-term length loan, it’s imperative to analyze both plans to ascertain, which is superior for you.
Defining a Term
The common fallacy is that a mortgage term stipulates the total length of the mortgage, precisely the amount of time it will take to pay your mortgage in full. On the contrary, that is what is called a mortgage amortization. “Term” actually refers to an agreement that establishes the interest rate, along with other inclusive mortgage features, over a set period. Mortgage terms may range from six months to ten years. Note, however, that anything beyond four years is considered a long-term mortgage.
A prevalence of mortgages is negotiated over a 25-year amortization period; more definitively, it will be paid off 25 years following the initial payment. However, within that time frame, there will be a series of negotiated terms for a set number of years. The arbitration will occur, in which the interest rate will also change initiated by the current premium of the lender at that time and the state of your finances.
The Short and Long of It
If you choose a long-term relationship with your mortgage, you lock in your interest rate for a sustained amount of time, but you pay a premium for the financial certainty. There is a monumental contrast between a ten-year term rate and a five-year option; the longer-term having an augmented interest rate ranging from 1–3 percent. When evaluating Toronto real estate listings, though, affordability becomes questionable. Despite the numbers, many Canadians are amenable to investing in peace of mind. Being cognizant of a stable mortgage payment that will not be influenced by economic fluctuations make it justifiable.
Clearly defined, steady payments are conducive for effective budgeting; you’ll know for certain what your housing costs will be for a longer time. Long-term mortgages stipulate that you may not be able to make any changes to your mortgage contract for several years without having to pay a prepayment penalty.
The shorter the mortgage term, the lower the interest rate, as consequently, you succumb to a greater element of risk being vulnerable to changes in the marketplace. So, if you’re willing to handle potential instability as rates fluctuate and renegotiate at a more frequent rate, you will have lower monthly premiums and could realize substantial long-term savings.
Overall, a short-term mortgage represents less of a commitment, which is ideal for those who anticipate life changes. If you necessitate breaking your term, the prepayment charge will be significantly lower. If you ultimately wish to improve your credit score and qualify for an even better rate ensuing, a short-term mortgage is the chosen option, successfully paying the mortgage and fulfilling the shorter term.
At the end of your mortgage term, you have a few options available: you may pay off the remaining balance of the mortgage, renew it, or even switch lenders. During negotiations, your interest rate changes at this time. It will be based on the current rate of the lender, your standing as a borrower, and, finally, the state of your finances.
Five-year terms are the most popular in Canada and are considered the “Goldilocks” of mortgages. They offer the ideal amount of stability over time, and you may deviate from your rate and features over the medium term. The superior choice cannot be defined if we consider how erratic life circumstances could be, so connecting with a mortgage advisor will be advantageous to discuss both your distinct short-term and long-term plans and goals.
Our expert team at Northwood Mortgage™ has many more answers to simple or more intricate mortgage questions, and we look forward to connecting with you. As one of the most venerated brokerages in the GTA, our team exemplifies prize services and choice products to our clients, lenders, and investors alike.