A 10-year, fixed-rate mortgage term hovering around 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 (the longest mortgage term Canada usually offers).
Amortization is how long it takes to pay the mortgage in full. While 40-year amortization periods are long gone, you can still get a 30-year amortization with 20% down. Borrowers with less down qualify for amortization periods of up to 25 years.
Are Short-term Mortgages Worth It?
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. And you’ll be forced to renew regularly.
Locking in a Longer Mortgage Term
Five-year mortgages are standard in Canada, but that’s not your only option. Lock in for the long term and you could enjoy stable interest rates for seven or even 10 years. It’s tempting when inflation is high and you worry about affording your mortgage, or interest rates are impossibly low. 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. Arrange home appraisals.
- 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 initially introduced. How the mortgage stress test affects you.
- 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. Watch 6 questions to ask your mortgage lender on Vimeo.
- You can sleep at night 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. Reduce prepayment penalties.
- 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. Tips from a second mortgage settlement lawyer.
- 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. What is negative amortization?
- 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. Using your retirement home for a reverse mortgage.
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