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How to choose a mortgage term in Canada?

Different mortgage offerings provide different terms. The term is the period of time in which you are locked into a mortgage rate with your lender, as well as the conditions set out within the mortgage agreement. There is a wide variety of mortgage term lengths, and they generally range anywhere from 6 months all the way to 10 years. The most common and popular term in Canada sits at 5 years.

When your mortgage term expires, you will need to renew your mortgage with your lender. However, it also allows you to look towards other lenders who may provide better rates.

What’s the best mortgage term for you?

Your mortgage term will likely be decided by your own personal financial circumstances, as well as your long and short-term financial goals. Generally speaking, if you lock yourself into a longer-term, the mortgage provider will give you a better rate than if you lock-in to a short-term mortgage.

Therefore, if you’re looking to keep your monthly payments at a minimum, a longer-term will likely be a better option for you. Also, if interest rates rise, a longer-term will provide an added buffer of protection. However, a shorter term will provide a little more flexibility, which may be beneficial for someone looking to make a swift move up the property ladder in the coming years.

It is important to try and look into the future and what your current plan is. If you foresee yourself moving and selling your property in the next couple of years, then avoid locking yourself into something longer than your planned stay. There will be a prepayment penalty fee payable if you sell your house before your term is over.

TD Canada Trust’s study showed that 7 out of 10 Canadian homebuyers moved sooner than they had initially planned. Therefore, even if you think you will live somewhere for 10 years, it is sometimes better to err on the side of caution here.

The term you choose will have a direct impact on your interest rate. Therefore your current personal circumstance will dictate the length of term that suits you in keeping your monthly payments at a point suitable for yourself.

Breaking your mortgage terms

As discussed, it is important to get the length of your term just right, especially if you think of selling your property within a certain period of time.

Unfortunately, life is often unpredictable, and personal circumstances may dramatically change, causing you to sell your property and break your mortgage term early.

If you have to break your mortgage term early, you may likely incur some significant prepayment fees. It is important to keep this in the back of your mind when choosing your mortgage term.

How to avoid breaking your mortgage term

It is possible to avoid breaking your mortgage term, and incurring fees, while still changing your mortgage.

Some lenders will allow you to port your mortgage to a new property as long as you keep your business with that lender. This means you can sell your current property and move up the property ladder without being hit by the significant fees normally associated with breaking the terms.

Mortgage Term Popularity

The term which individuals normally subscribe to in Canada can vary significantly based upon age group. As previously stated, when looking at the term options as a whole, the most popular is a 5-year term, which 66% of Canadians will subscribe to. However, if you drill-down into the statistics, you will realize that younger individuals (18 to 34 years old) will be more likely to take on a 2-4 year mortgage than anyone in the 35-54 or 55+ category. 27% of all 18-34-year-olds choose this mortgage term category, compared to 12% of 55+’s

Terms beyond 6 years are quite uncommon, and anything beyond 10 years generally isn’t available; as we can see, this is subscribed to by the 55+ group, but nobody else, and even then, only 2% chose a term beyond 10 years.

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