Benefits of Choosing Shorter-Term Mortgages
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.
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.
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.
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.