Determining what mortgage term and rate are good for you

1. If you will need to pay off the mortgage at any time without penalty you might want to consider an open term, but be prepared to pay a significantly higher rate of interest for that kind of flexibility.

2. If you only intend to keep the property for a defined period of time you might want to consider matching the term to that timeframe ie a 1, 2 or 3 year term for example. Surprisingly, rates are not much lower for terms less than 5 years (and may be higher), but the penalty would likely be lower as that is based in part on the length of time until the end of the term.

3. If you think that rates may be going down over the next few years (ex. Bank of Canada has indicated that they will likely be lowering prime over the course of the next couple of years) then a five year variable rate strategy might be the best course of action. There have been a couple of studies that have indicated that a variable strategy over the life of the mortgage has historically been the most cost effective.

4. If you want to take advantage of the most competitive space for lenders, and you are anticipating no major changes in your life for the next five years, then a five year term may fit the bill. The five year rate seems to be the sweet spot for Canadians, and the most competitive for lenders.

5. If you are very concerned about rates going up and want the comfort of a longer term you might want to consider seven or ten years. Be prepared to pay premium for that comfort as there is often quite a spread between the five year term and the longer terms.

People can regret their decision if rates don’t move as they had anticipated. It is important to remember that just because things did not play out as you thought they would does not mean that your decision was incorrect!

Karen Lemieux
Mortgage Brokers Ottawa