Different mortgage offers involve different terms. The term, or duration, is the period of time during which you are bound to a mortgage rate with your lender and to the terms and conditions defined in the mortgage agreement. There are a wide variety of mortgage terms, typically ranging from 6 months to 10 years. The most common and popular term in Canada is 5 years.
When your mortgage matures, you will need to renew it with your lender. However, it also allows you to look at other lenders who may offer better rates.
Which mortgage term is right for you?
The term of your mortgage will likely be determined by your personal financial situation, as well as your short and long-term financial goals. Generally speaking, if you commit to a longer term, the lender will give you a better rate than if you commit to a shorter term.
Therefore, if you are looking to keep your monthly payments to a minimum, a longer term will probably be a better option for you. In addition, if interest rates rise, a long-term contract offers additional protection. However, a shorter term allows for a bit more flexibility, which can be beneficial for someone looking to quickly climb the real estate ladder in the coming years.
It is important to try to look ahead and know what your current plan is. If you plan to move and sell your property within the next two years, avoid committing to a longer contract than necessary. A prepayment penalty fee will be charged if you sell your home before the end of the term.
The TD Canada Trust study found that 7 out of 10 Canadian homebuyers moved sooner than they had originally planned. So even if you think you’re going to live somewhere for ten years, sometimes it’s best to be cautious.
The term you choose will have a direct impact on your interest rate. Your current personal situation will determine the length of time that is appropriate for you to keep your monthly payments at a level that is convenient for you.
Breaking your mortgage contract before the end of the term
As we have seen, it is important to choose the length of your mortgage carefully, especially if you plan to sell your property within a certain time frame.
Unfortunately, life is often unpredictable and personal circumstances can change dramatically, leading you to sell your property and break your mortgage early.
If you have to break your mortgage agreement early, you may incur significant prepayment fees. It is important to keep this in mind when choosing the term of your mortgage.
How to avoid breaking your mortgage contract early
It is possible to avoid breaking the term of your mortgage and incurring fees, while modifying your mortgage.
Some lenders will allow you to transfer your mortgage to a new property, provided you remain a customer of that lender. This means that you can sell your current property and move up the real estate ladder without having to pay the significant fees normally associated with breaking conditions.
Popularity of the mortgage term
The length of time chosen by Canadians can vary considerably depending on the age group. As mentioned earlier, when looking at all the term options, the most popular is the 5-year term, which 66% of Canadians subscribe to. However, if you look at the statistics in detail, you will find that younger people (18-34) are more likely to take out a 2-4 year mortgage than those in the 35-54 or 55+ age categories. 27% of 18 to 34 year olds choose this mortgage term category, compared to 12% of those 55 and older.
Terms longer than 6 years are quite rare, and terms longer than 10 years are generally not available; as we can see, these terms are purchased by the 55+ group, but by no one else, and even then only 2% chose a term longer than 10 years.