Purchasing a mortgage is a large investment, especially when you factor in all of the various rates, payment plans, and terms and conditions that go along with each.
You may have found the perfect rate, the perfect payment plan, and even the perfect conditions… But what about the term? Now that seems to be a factor that always stumps people.
Which term should I go with? Long or short term? Arise Mortgage, help me choose!
We’ve heard it all!
It is no surprise that the past year has been unpredictable when it comes to Canada’s increasing interest rates. With a new rate being announced every few months, and countless sighs being heard across the country, it is no wonder that many are struggling to lock down a term they are comfortable with when it comes to their mortgage.
Many often lean towards a short-term mortgage in order to lessen the effects of the rising interest rates. While we often agree, there are pros and cons that must be assessed before you make the decision to go with a short-term mortgage.
But fear not! We are here to break down advantages and disadvantages, so you can choose if a short-term mortgage works best for you and your finances now, and in the long run. Let’s dive in!
Pros of a Short-Term Mortgage
Lower Initial Interest Rate: If the Bank of Canada’s unpredictability with their interest rates are spooking you, a short-term mortgage may be the best option for you due to the fact that they offer you a lower initial interest rate. This can result in lower monthly mortgage payments, potentially saving you money right off the bat.
Increased Flexibility: Where long-term mortgage rates often fall short of flexibility, short-term mortgage rates shine. Short-term mortgage rates are great for flexibility, as they are usually only less than 3 years. This duration allows you to reassess your financial situation against the current market on a more frequent basis, and adjust it according to your needs.
Quicker Mortgage Payoff: With a short-term mortgage, you will be able to pay your entire mortgage payment off in a shorter period of time. This means you'll pay less interest over the life of the loan, potentially saving a lot of money in interest payments.
Low Refinancing Costs: If you have a plan to refinance your mortgage, a short-term mortgage may be the best option for you. The expenses associated with refinancing can be expensive when you have a long-term mortgage, which makes the short-term mortgage a more favourable option for those who are looking to refinance their mortgage.
Cons of a Short-Term Mortgage
Interest Rate Increasing Risk: While your initial interest rate may be locked in during your short-term mortgage, you may be subjected to an increase in interest rates throughout the duration of your mortgage. When your initial term expires, you must renew your mortgage at the current interest rate. If the interest rate is high at the moment when you are expected to renew, your monthly payments may increase as a result.
Less Stability: While a short-term mortgage is great for flexibility, there is less stability as a result. With the possible fluctuation of interest rates during your short-term mortgage, your monthly mortgage payments may be more unpredictable as a result. This may result in difficulty with budgeting and planning out your mortgage payments.
Limited Flexibility for Financial Planning: As mentioned, rising interest rates play a key role in any short-term mortgage. As a result, this makes financial planning and budgeting a little more difficult than if you were locked into a rate with a fixed monthly payment. That is why short-term mortgages require higher attention to detail to ensure that you are getting the most out of your short-term rate.
Let’s Talk Short-Term Mortgages!
If you have reached this point in the article, and are still unsure if a short-term mortgage is right for you and your finances, let’s get in touch! Together, we will assess your current financial situation and compare all possible options to ensure you are getting the most out of your mortgage.
Book a consultation today! We’d love to chat with you.