Understanding the term length of your mortgage can be vital to optimizing your investment. It is important to know how long your mortgage term is, given your interest rate and mortgage type, so that you can benefit from new opportunities after the term expires.
It is also essential to understand that the average amortization periods in Canada are 25 or 30 years. This means that you can decide your mortgage term strategy during the start of the investment period, and chart all your payments through the duration of the amortization period.
You can prepare multiple plans, with the help of a qualified broker, to understand what benefits can be potentially made available upon term expiration. Based on the changes that govern interest rates and home prices, you can opt for fixed or variable mortgages every renewal period.
Selecting the right mortgage term also requires that you work with the right broker. At sHelto, you can gain access to a wider network of lenders who can analyse your specific case and provide the right interest rates and lending terms. You can work with our professional brokers to get insights on what mortgage terms are right for your investment.
How shorter term mortgages impact your investment
Shorter term mortgage periods are becoming increasingly popular in Canada, as borrowers can understand the market trends within the 5-7 year space. With only around 1/3rd of Canadian mortgage holders are that saying they can meet their financial obligations without difficulty, and selecting the right mortgage term can be crucial to meet those obligations.
Housing prices, interest rate changes, Bank of Canada policies, and macroeconomic factors can change the way borrowers view their mortgages. A shorter mortgage term offers flexibility to borrowers who can explore other mortgage solutions during their end term year. They can opt for a renewal strategy or even change their mortgage type from fixed to variable or vice-versa.
As an investment strategy, a shorter term mortgage is ideal during highly volatile periods, wherein there may be a more viable mortgage offering available in another 3-5 years. If there is limited growth within the next 5 years, then banks may start to lower their interest rates to introduce new buyers into the market.
A longer mortgage term strategy can also be viable
A longer term strategy may be helpful in reducing variability and fluctuation in monthly payments. You may also prefer a longer term strategy for a larger down payment on a higher purchase price property. In Canada, a longer term strategy can be anywhere between 5 and 10 years generally.
You can also lock-in an interest rate that is favorable to you, based on your long-term investment strategy. You don’t need to worry about deciding what rate to choose at the end of the term period every time.
You can also opt for a convertible term mortgage, which allows your shorter term mortgage to become a longer term one after the ending of the term. You can check for variable rate mortgage plans, fixed rate mortgage solutions, as well as different term lengths when you opt for a convertible solution.
What mortgage term is right for me?
You can start by asking yourself these questions, with the help of a broker, to gauge your overall term strategy for your current or desired property.
What’s your investment goal?
It’s important to start with your overall investment goal. If you want to benefit from rate changes and greater macroeconomic trends, then shorter term strategies are ideal for you. For more structure in your monthly mortgage payments, you should opt for a fixed longer term mortgage.
Can you budget for the mortgage payments?
The other important factor to consider is your monthly payment. It doesn’t matter how long or short your mortgage term is, your ability to make the monthly obligations will be one of the most important factors in your investment decision.
What’s your risk tolerance?
For families that require structured payments and predictable obligations, it is better to opt for a longer term strategy. You can also check your risk tolerance when you are investing for the first time or are investing in multiple properties.
Have you considered all costs involved?
It’s important to consider all costs involved when choosing the right term. You need to capture insurance, fees, and other additional expenditures when comparing different terms. This can help you understand the potential leverage available when choosing the right term.
Use these factors to prepare your mortgage term investment strategy
It is important to keep these parameters in mind when thinking about your mortgage term.
Understand the market trend
Many Canadian borrowers are opting for increasingly shorter term mortgages so that they’re able to make a better decision in the future. They are able to opt for even 1 or 3 year mortgage terms, with fixed term mortgages being the favoured solution for several borrowers in the market.
It’s also important to know whether borrowers are opting for open or closed mortgages. This can help you determine what term length is ideal for you, based on your financial projections, predictive obligations, etc. You can choose the right term length based on whether you prefer open or closed plans.
Getting the right interest rate
The right mortgage term will depend on whether you’re able to get the right interest rates, based on your credit history, gross debt service ratio, down payment, etc. However, you’re also able to check whether you’re able to get a better mortgage at a 5 year fixed or a 3 year variable based on the institution’s offerings.
You can also consult with different types of lenders to determine which provider is offering the right interest rates. You can check for a matrix of options across lending types, to find the right term that fits with the interest rate desired for your mortgage.
Selecting the right type
The right type of mortgage will impact your financial obligations, while also helping you chart your amortization period, mortgage loan structure, and mortgage balance at the end of the term. Fixed plans offer structured monthly mortgage payments, while variable allows you to benefit from potential rate drops.
After you’ve consulted with a broker about the right type of mortgage for you, you can chart your payments based on different term years. You can find the sweet spot, which is generally 3-5 years, and get stared on your home ownership journey.
Reviewing mortgage penalties
This is where you can start to select the right type of mortgage term based on the prepayment penalties and other costs involved in terms of penalties. You can check for the prepayment penalties associated upon selling prior to 5 years, and other fees associated with breaking the mortgage early.
You can check for the various fees attached to 3, 5, and 7 year mortgage terms, to make the right decision for your investment. If you are certain that you don’t intend to sell your home or switch your mortgage to a different type, then getting a long term mortgage is ideal for you.
Budgeting for financial obligations
Budgeting will be another vital component to the mortgage investment strategy. It is vital to track your monthly expenditure and check your potential budget for a monthly mortgage payment. Additionally, you should understand your monthly mortgage payment, the mortgage principal, mortgage life insurance obligations, and other important factors.
It’s also vital to account for the CMHC (Canadian mortgage and housing corporation) insurance, the mortgage amortization period, the interest adjustment date, and other costs that will be integrated into the overall mortgage agreement.
