What’s the best mortgage term right now?

With rates so low, what’s the best mortgage term right now?

BY: RON ANGELES

During this pandemic, many businesses have been affected and sad to say many of them are struggling both the small business owners and even larger companies. How about the mortgage and real estate industries? With the historic lows when it comes to interest rates offered by the different mortgage companies. Canadian buyers are locked into new mortgages, but for how long?

It may be tempting to stick with the old five-year term especially with lenders offering 1.99% fixed rates. Is it the best option for the Hamilton Buyer or for the Canadians as a whole?
Maybe it is time to reassess our assumptions and choose the best term now and for the future during this pandemic period.

What is a mortgage term?

A mortgage term is the length of time you choose to sign on with a particular lender, whether that’s a private mortgage investment corporation, credit union, and of course the major banks.

The amortization is your total number of years you need to pay for your mortgage. The common length or duration in Canada is 25 years to pay. During this span of time, you will have different terms with different lenders looking for the best terms or staying with the same lender as a common decision. Although five years are the common term it can range from six to 10 years. All the conditions with the lender will last for the entire term, including the interest rate. What’s the right term while rates are so low? It depends on every home buyer, Jesse Abrams said. A co-founder and CEO of Homewise, an online Toronto-based mortgage broker.

For homebuyers who are not planning to move within the next five years, Abrams says the longer term is a great choice because the five-year rates are way low nowadays.

Although it is usually more expensive compared to the shorter terms, you’ll get a better rate, and payment wouldn’t fluctuate with today’s pandemic and economic uncertainty.

Longer-term is surviving big and surprisingly life-changing. For instance, if you lose your job or decide to take a year break. You don’t need to undergo a renewal process and re-prove if you are a qualified borrower while your income is on-hold.

If you are thinking of living less than three years for example. Abrams says it was better to choose the shorter term. If you plan to move, you are breaking the agreement with your lender. The penalty for doing so can be 4% of your fixed-rate mortgage. Let us say for a $500,000 mortgage, this is $20,000.

Here is the table or snapshot of a fixed-rate that would help you in different terms courtesy of Homewise.

The scenario:

A high-ratio buyer making a less than 20% deposit on a $500,000 mortgage for a home worth less than $1 million.

If an insurable buyer is making a greater than 20% deposit, the numbers shift a bit:

What’s the best term when interest rates go higher again?

I would suggest choosing the longer-term if the rates are low and shorter-term if the rates are high so your renewal will come up in time to grab the advantage of low rates once they kick in the market again.

Abrams suggests that once the interest rates go over 3.5%, choose and consider a shorter-term with a variable mortgage so can easily refinance once the rates go down again. The advantage of a variable rate compared to fixed-rate is a lower penalty for breaking your agreement earlier.

Also remember, choosing a mortgage is not all about the best rates, you need to consider the features to make your life less stressful and inexpensive in the future.

Although the flexible mortgage has a higher rate, if you want to pay it fast, then no need to pay for costly penalties. No need to worry about the high penalties if you’re breaking the amortization agreement.