How to choose your mortgage term
August 23 2016
What you'll learn
- What is a mortgage term?
- How to choose your mortgage term
- How to pay less interest on your mortgage
When you negotiate a mortgage, its term has a major influence on the interest rate. More specifically, a mortgage term is defined as the length of a loan after which you need to renew the clauses in your agreement if you haven’t paid off the balance.
You can choose between short-, long- or very-long-term loans: each has its pros and cons. The most important thing you need to do is to select a mortgage term that corresponds to your financial situation at the present time.
The biggest advantage to short-term mortgages is that they have good interest rates. In fact, the rule is fairly simple (but with exceptions!): the longer the term, the higher the interest rates.
However, don’t forget that short-term mortgages are like the stock market; your decision will be based on your tolerance for risk.
For example, if your risk tolerance is low and you want to remain in your home for over 10 years, you will most likely select a longer term mortgage, because you want to protect yourself from sudden increases in your interest rate.
However, if your main focus is to get the lowest interest rate possible and you tolerate risk very well, a short-term mortgage is probably your best bet.
A mortgage rate adapted to your objectives
Let’s take another example. You are in the process of purchasing a secondary home that you want to renovate and sell it (for a profit, we hope!) within the next eight months. A short-term mortgage is clearly your best option in this situation. You can sign a one-year mortgage and avoid paying any penalties when you sell your property. What’s more: you’ll likely benefit from one of the best interest rates on the market.
If your financial situation does not allow you to cover your normal mortgage payments, you may want to consider renewing your mortgage over a longer term (several decades). But don’t forget: at the end of your mortgage, your dream home will end up costing you more, even though your monthly payments are low. In addition, a long-term mortgage means you are tied to the same financial institution for a very long time. As a result, your bargaining power is almost nil.
How to pay less interest on your mortgage
Some may respond: the rate, the rate, the rate! Of course, the rate is at the forefront of any strategy to pay less interest on your mortgage.
However, the best way to pay less interest is to reimburse your mortgage as quickly as possible. If you can pay off your mortgage in 10 years, rather than 25, you’ll go a long way in saving money—regardless of the rate (or almost!).
There are several ways you can reimburse your mortgage more quickly without breaking the bank. For example, you can make accelerated weekly payments. A mortgage payment calculator can give you a clear view of your options based on different amortizations and terms.
- A mortgage can be short-, long- or very-long-term. In all cases, the term will have an impact on the interest rate.
- Generally, the longer the term, the higher the interest rate.
- Your risk tolerance and personal objectives are the determining factors when selecting your mortgage term.