Choosing the mortgage term that’s right for you
From The Condo Guide Magazine
Almost every time that we help arrange mortgages for our clients, they ask us whether they should go with a shorter or longer term. Our answer: for some people, having a long-term mortgage makes a lot of sense; for others a short-term mortgage will best meet their needs. Of course, there is no one right answer, but here is an important list of things to consider.
When you are selecting the term for your mortgage, it is important to recognize that generally, the longer the term of your mortgage, the higher the interest rate. A good way to think of the difference between a short vs. a long-term rate is as an insurance premium. The financial institution generally wants to be compensated by you in order to guarantee the rate of your mortgage over a longer period of time. What you have to decide is whether or not the insurance premium (difference between short- vs. long-term rates) is worth paying in your circumstances.
Many people have heard the theory that you are better off continually renewing with short terms and paying down your mortgage. This philosophy has held true in the past, provided that the extra amount saved from selecting a short term is applied to reducing your principal mortgage balance outstanding. There is potential to gain by using this method, but you are also exposed to the risk that rates could be substantially higher by the time you have to renew.
Many of the consumers in today’s market are buying homes with 5% down and extending their debt servicing to extreme levels. While I believe that the dream of home ownership is a very fulfilling and worthwhile pursuit, I caution that you should do your financial planning carefully.
It is important to realize that interest rates today are at near historical lows. Many people who can afford homes today would never have been able to make such a purchase at the interest rates five years ago. It is critical that you understand the following: You repay very little of your principal balance over the first few years of your mortgage. This means that people who expect to see very little pay increase over the next few years should definitely consider the consequences. Over the last 30 years, the average five-year mortgage rate has been approximately 11%.
Ask yourself this question: if mortgage rates are at 11%, when it’s time to renew, will you be able to afford to keep your home? If your answer is a comfortable “yes,” then I suggest that you choose the term with which you feel happiest. If your answer is even possibly no, then find as long a term as possible. By the time a 10-year term comes up for renewal, you will at least have paid off a larger portion of your principal, and may be able to extend your financing over a longer term in order to make your payments more affordable.
If the property you are financing is being used, or is going to be used, as an investment property, then again, the longer-term mortgage product makes sense. It offers you peace of mind and the opportunity to do fairly accurate projection of revenues and expenses for the term that you choose.
Remember, there is no mortgage product that can be all things to all people. Make sure you are informed and find the product that best meets your needs. Until next time, best of luck finding your mortgage and home.
New Homes & Condos Magazine is an excellent source of housing information for those looking for information on new homes and condos in Ontario, Canada. We offer the most up-to-date information on new communities across the Greater Toronto Area.
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