Our Canadian mortgage market has created a flexible system for finding home finance. Canadian homeowners can choose between a variety of lengths for their mortgages, which are loosely categorized as short or long term mortgages. Read on to discover which type is better for you.
Mortgage Term VS Amortization Period
First of all, it is important to understand the difference between your “mortgage term period” and your “amortization period.” Your mortgage term period is how long your financing will last. The amortization period is how long it takes until your house is finally paid off.
Gradually, the maximum amortization period for Canadian mortgages has been reduced. In 2008, Canada reduced the maximum amortization period from 40 to 30 years. In 2012, the maximum amortization period was reduced down to 25 years.
Nowadays, the standard Canadian mortgage will average 5 years and be amortized for 25 years. The industry categorizes mortgage periods as either shorter term mortgages (less than 3 years) or longer term mortgages (longer than 3 years). Pick which is best for you.
What Do You Want From Your Mortgage?
Just like the seasons, your life goes through transitions. The needs of a young married couple for their first home is vastly different than an empty nester. Over time, your house will fill with occupants and belongings. The term of your mortgage can also be set to properly mirror these seasons of your life.
Short Term Mortgage
While you may need immediate housing, you might also feel that your life remains in flux and you might want some flexibility in your housing loan. You might have a new baby and feel almost ready for a larger second home. Perhaps, your elderly parent is becoming more dependent and you might need a larger house for a live-in nurse. There is no point in signing up for a mortgage that does not fit your lifestyle.
In an uncertain world, you may prefer to leave some “wiggle room” in your debt obligations. A shorter mortgage term allows you to complete one phase of your life. Here are just a few of the advantages of the shorter mortgage term:
- Lower rate
- Life changes
- Fix credit score
Shorter loans tend to have lower interest rates. Your family has more flexibility and the freedom to change housing in the near term, if needed. You have a better chance of avoiding “prepayment penalties” with a shorter loan.
Also, if your credit is sub-par, then a shorter mortgage makes more sense. When the loan expires, you might qualify for a better mortgage with a lower interest rate.
The shorter term financing will need to be renewed more often. This will necessitate that you devote time to signing a new mortgage. Here are a few of the other disadvantages to shorter term housing loans:
- Less stability
- Rates might change
- More transaction costs
Every time, you renew your mortgage you will face at least two unknowns: 1. Interest rate and 2. Transaction costs. The rates might change, which could be a plus or minus. More shorter mortgages will lead to more transaction costs.
Long Term Mortgage
Some homeowners simply don’t want to be bothered with trying to gauge the mortgage market interest rates. They know how much they need to pay each month and how long it will take to repay their housing debt.
You might find a great financial lender and simply want to sign up for the long haul. Here are some of the primary advantages to a long term mortgage:
- Easy to budget
- Develop financial relationship
You can calculate the exact day when your home will be fully amortized with a long term mortgage. Homeowners can develop a deeper relationship with your lending institution.
When you have a long term loan, you probably won’t be able to adjust it due to changing circumstances. If rates go lower, you will be stuck with a higher rate. Here are the primary disadvantages of a long term mortgage:
- Higher rate
Life is full of surprises and long-term mortgages don’t allow you to move up to a larger second home or downsize after you retire. The terms tend to be quite rigid and costly to modify.
Select the Best Fitting Mortgage For You
No matter what you choose – short or long term mortgage – make sure you find the best financial product for your situation. The best mortgage fits your life. Request your free mortgage quote, and talk to someone who can help you make the right decision.