Borrow Short Term, Refinance Your Mortgage Later

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Shorter Mortgage Terms

In a higher interest rate environment, there are some advantages to mortgage borrowing over a shorter mortgage term and refinancing at a later date.

Here are some potential advantages:

1 – Lower interest rate

When you take out a mortgage over a shorter term, you may be able to secure a lower interest rate than you would with a longer-term mortgage.

This is because lenders typically view shorter-term mortgages as less risky, since they are repaid more quickly.

The above information is economically and historically sound however, currently 3-year fixed mortgage rates in Canada are higher than 5-year rates. Now, that being said, rates are changing rapidly in Canada and my purpose in writing is simply to provide you with options and ways to re-consider generic mortgage strategy.

Another way to look at this shorter term strategy would be:

Taking say a 3-year rate with a higher rate than a 5-year fixed
Your strategy depends on rates being lower after the 3-year rate term expires so you can enjoy the subsequent years at a lower renewal rate

***Canadian mortgage rates have historically been between 5% and 6%. Recent ultra-low rates may not return any time soon.

Caveat being I don’t have a crystal ball.

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2 – Flexibility

By taking out a shorter-term mortgage, you have the flexibility to refinance sooner if interest rates fall or your financial situation changes.

Points to consider:

You can refinance at any time – you will just be subjected to pre-payment penalties if you make changes before the end of your term (penalties which should be illegal, penalties which do not exist on conventional mortgages in the US, but cost Canadians thousands every year – it’s a super expensive cash grab, wonder why your banks always have gross profits? – rant over)
Having a shorter term means you can renew or refinance your loan sooner without getting hit with the above penalties.
Also, you would be able to sell your home after your term expires avoiding many of those same penalties and fees

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Disadvantages to Shorter Term Mortgage Financing

However, there are also potential disadvantages to this strategy.

For example, refinancing your mortgage can be expensive, as there may be fees associated with closing your current mortgage and opening a new one – think legal, appraisal.
Additionally, if interest rates rise in the future, you may end up paying more in interest payments overall than you would have with a longer-term mortgage.