Benefits of Choosing Shorter-Term Mortgages

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Today’s Mortgage Environment

As mortgage rates continue to rise, homebuyers and owners are looking for ways to balance the risk and reward through the benefits of choosing shorter-term mortgages

With the Bank of Canada’s recent rate hikes, the popular 5-year fixed rate, traditionally the go-to for low-risk appetite, now carries an increased risk of paying a higher rate for longer.

On the other hand, 5-year variable rates, usually the choice for a tight budget, have become a high-risk option.

3-Year Rates

With the uncertainty in the post-pandemic market, many clients are taking a closer look at shorter terms, such as 2 or 3-year fixed rates. According to a variety of economists, the 3-year term is today’s sweet spot. In three years, rates are anticipated to be lower, giving clients an opportunity to renew into a lower rate and payment to save more.

Shorter Term Mortgage Benefits

Shorter-term mortgages come with several benefits.

For instance, if rates go down, homeowners can renew into a lower rate sooner. Even if the short-term rate is higher than the 5-year fixed rate, renewing into a lower rate earlier can save more in the long run.

Additionally, the average Canadian homeowner only makes it to 3.89 years of their 5-year term, meaning that a shorter-term mortgage could save more by avoiding paying penalties and fees.

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Short Term Mortgage Rate Flexibility

During a time of rate volatility, a shorter-term fixed rate may provide more payment certainty while allowing an earlier opportunity to change your rate.

And while shorter-term rates may be higher than 5-year fixed rates, it’s often the case that they’re lower than the variable rates.

Short Term Mortgage Rate Downsides

It’s worth noting that shorter-term mortgages do have some downsides.

Renewing sooner can be time-consuming and stressful. If rates go up, homeowners may pay a higher rate sooner.

Also, if short-term rates are higher than a 5-year variable or fixed, they’ll pay more interest during the term.

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Savings with Short Term Mortgage Rates

However, surfing shorter terms could help save more over the life of the mortgage. During more economically-stable times, short-term fixed mortgage rates tend to be lower than 5-year fixed rates.

Locking in with a low, shorter-term mortgage rate can offer the benefit of knowing your rate and payments are fixed while saving cash. And homeowners will have the opportunity to make a change or possibly renew into even lower rates earlier, penalty-free.

Conclusions and Further Thoughts

Huber Mortgage advises all mortgage decisions be made with an eye to the long term effects.  Having a clear long term vision will help you achieve your goals

In today’s market, a shorter-term strategy may offer a middle-ground of risk to average out more savings over the life of a mortgage.

It’s not as high-risk as riding out the ups and downs of a variable-rate term and may offer increased savings over the safer 5-year fixed term.



PS – One of my hobbies is blogging about mortgages, debt and government policy.  During the day I’m a MORTGAGE BROKER in Kelowna, BC!

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