The best mortgage term

Most borrowers focus on finding the best interest rate when they are shopping for a mortgage.

That is, of course, important as it determines what amount you will be paying for your monthly payments, but you need to look beyond the interest rate to the length of your mortgage contract (the term) as that will have the most impact on your overall costs.

The term of your mortgage, how long you have before you need to renegotiate your mortgage, should be your primary concern, as that will affect the flexibility you have with your mortgage.

We have mortgage terms available from six months to 10 years, so many options available with many different lenders.

Let’s take a look at three of the more common mortgage term lengths in Canada.

Three year fixed term

This mortgage term is chosen by approximately 20% of mortgage borrowers as it offers the flexibility of a shorter term mortgage.

This is great option if you are uncertain about what the future might hold as long-term plans may not be firm. It offers a great interest rate for a reasonable period of time and, at the end of the term, you can reconsider your options.

It might take a little more comparison of lenders to find the best three-year rate as the low promotional rates are not available quite as often with this product but the rates are generally lower than a five year fixed term mortgage at most times.

Five year fixed term

This is the most popular mortgage term in Canada. More than 50% of borrowers commit to a five-year, fixed-term mortgage.

Why? Because it’s the term that is pushed most by the big banks. And why do banks push five year fixed term mortgages — it’s a great investment for a bank. They lock you in for a long period of time and if you break the mortgage early, they can charge you a penalty.

They are counting on you to stay with them for five years and if not they are going to penalize you.

The reality is that close to 60% of borrowers who have a five-year, fixed-term mortgage break their mortgage early either:

• To refinance to access equity
• There’s a marriage break up and the home needs to be sold
• There’s a lower rate available at another lender and they want to switch lenders.
• Any number of reasons.

Rates on five-year, fixed-term mortgages tend to be slightly higher than shorter-term mortgages unless a lender happens to be promoting a rate special but it’s a good midpoint for a rate hold.

10 year fixed term

This is the least popular mortgage term in Canada, but it’s an option that should be considered more when making a decision for your mortgage term.

It’s a fairly safe choice if you have no plans to sell your home and move in the next 10 years. It gives you the security of knowing that your mortgage payment will not increase for a long time.

This one is for the long-term planners who are staying put.

If you break your mortgage term within the first five years on a 10-year term, you could be facing massive penalties, but if you go past the first five years, then the maximum penalty that can be charged is three months interest.

A potentially lower penalty than if you had taken a five year, fixed term then renewed for another five-year term and then break your mortgage before the end of the second renewal term.

Rates are slightly higher than other terms but today’s rate at one my lenders is offering 3.04% for their 10-year term. Historically speaking, this is a great rate.

My best advice is to consider more than just a five-year, fixed-term mortgage when you are choosing your mortgage term.

As your mortgage broker, I will review both your long term and short term plans so you can make your best decision. There are so many options available so don’t get stuck on a five-year, fixed-term because you believe it has the lowest rate.

Your term needs to fit both your long-term and short-term goals to work for you.

Please give me a call if you would like to discuss further at 1-888-561-2679 or email [email protected]. Let’s put your mortgage to work for you rather than vice versa.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.