Ten-year mortgages are at 5.6%. Going long can be appealing. Here’s what to expect if you do.
Picking a Mortgage Term
Obviously, you know this if you regularly buy or sell real estate, but just in case this is your first purchase: the mortgage term and amortization period are not the same. The mortgage term is the length of your mortgage agreement with a lender. It dictates your interest rate for the whole term of the agreement. You can go short or long, from six months to 10 years. Amortization is how long (six months to 30 years) it takes to pay the mortgage in full.
Low Rates, Shorter Term
Interest rates are at historic lows right now. Since short-term mortgages usually move in the same direction as interest rates, choosing a six-month term saves money, but not as much as more popular three- or five-year fixed rate mortgages. For instance, a mortgage at today’s rates would be 3.09% for six months, 2.19% for three years and 2.24% for five years.
Locking in a Longer Term
Low interest rates bring out the best in home buyers. Lock in for the long term and you could enjoy low interest rates for five, seven or even 10 years. It’s tempting. Let’s see how that would work.
Six Reasons to Pick a 10-Year Mortgage
- Getting a single, 10-year mortgage saves on home appraisal, refinancing and legal fees. A longer term frees you from the fuss and paperwork of changing mortgages every two to three years.
- You’ll be protected from changes to lending criteria. Home owners who already had mortgages were less affected when Canada’s new mortgage stress test was introduced.
- You can avoid credit checks until you refinance or buy a new home. Credit checks can affect your ability to take out other consumer loans, such as a chattel mortgage for a new car or motorhome. With a shorter term, you may have to pick your timing to prevent applying for yet another loan dragging down your credit score.
- Knowing what your payments will be for the next 10 years allows you to plan for the long term. Your wages will probably go up, while your mortgage payment stays the same.
- You can sleep nights knowing you don’t have to meet with a lender every few years to renegotiate your mortgage rate.
- Provided you wait long enough, a 10-year mortgage term can be cheaper to break than shorter terms. Penalties get shorter after the first five years. You’ll pay only three months’ interest to get out of the mortgage between years six to nine.
Decline a Long-term Mortgage If…
Long mortgage terms have their problems. You could:
- Pay higher penalties if you sell or refinance your home before the term is up. Especially if job transfers are a possibility or your home is an investment property, having a longer term ultimately means paying a larger penalty if you decide to sell two or three years in. Penalties are based on the number of years left in the mortgage. A shorter term has a smaller penalty.
- Make higher monthly payments than if you choose a shorter term. You sacrifice short-term savings by trying to guess which way interest rates will move when you renew or refinance. Higher payments give you less money for household emergencies or if your financial situation changes.
- Get stuck with early repayment fees that make paying down your mortgage quicker unattractive. While a 10-year term gives you financial stability, repayment fees can be a disincentive to make additional payments that reduce your overall interest costs. Prepayment penalties do decline after the fifth year, if you can wait that long.
- Discover portable mortgages aren’t so portable. While most lenders offer you the ability to move your existing 10-year mortgage to a new home, that rarely happens. A new home is likely to cost more than your current mortgage covers. Adding that extra mortgage financing can result in carrying a second mortgage that is more expensive than applying for a new mortgage altogether.
- Suffer sticker shock when the term is finally up. If you’ve enjoyed low interest rates for the past 10 years, imagine the potential impact on your budget when you go to renew.
- You may be reluctant to sell if house prices go up. Breaking your mortgage comes with penalties that have to be factored in before deciding if a market uptick is to your advantage.
Ready to make a decision? There are no right answers, just a series of choices that depend on your risk comfort level, finances and goals in life.
Sign Mortgage Refinancing Documents
Axess Law Ontario real estate lawyers discharge your mortgage loan agreement when you refinance. Remote video calls are available 7 days a week, from anywhere in Ontario. Make a day or evening appointment by calling toll-free to 1-877-552-9377 or 647-479-0118 in Toronto or using our online booking form. Licensed real estate lawyers are ready to meet with you in person at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices.
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Photo by Mohamed Chermiti|Pixabay.