When it comes to buying a home, choosing the right mortgage term is an important decision and deciding between a 3-year and 5-year can significantly impact your overall financial well-being.
Historically we have seen many Canadians favour the 5-year terms, however recently with the economic shifts, 3-year mortgage terms have gained popularity. Recent economic factors have created volatility in variable rates (significant increases) which means higher payment and interest costs than ever.
When deciding between mortgage terms, it’s important to assess what your personal goals and risk are. Let’s explore the pros and cons of each mortgage term to help decide which one is best for your financial future.
3-Year Fixed Rate Mortgage
Pros
- Take advantage of lower rates
- Shorter terms, typically have lower rates. In most cases, you can have a lower payment with a 3-year term vs. a 5 year term.
- Given the interest rate market, if interest rates drop during your 3-year term, you potentially can take advantage of lower interest rates sooner.
- Lower penalties for early termination
- If you need to break your mortgage early, the penalties for doing so are typically lower than those for longer-term mortgages. This can be an important consideration if you plan on moving or refinancing within the next few years.
- Flexibility
- With a shorter mortgage term, you can reassess your financial situation and possibly take advantage of new opportunities sooner. This could include refinancing at more favorable rates or making larger payments to pay off your mortgage sooner.
Cons
- More frequent renewal
- A 3-year term requires you to renew your mortgage more often, which can be time consuming and may result in additional costs such as appraisal and legal fees.
- Less rate stability
- A 3-year term provides less stability and predictability than a long-term mortgage. With a changing market, you are more exposed to interest rate fluctuations at renewal, potentially causing your monthly payments to increase sooner if rates rise.
5 Year Fixed Rate Mortgage
Pros
- Rate stability
- A 5-year fixed rate mortgage provides rate stability and predictability. You will know exactly how much your mortgage payments are for the next five years – making it easier for you to budget your finances and plan for your future.
- Safe from rate fluctuations
- Peace of mind knowing that you have a sense of security protecting you from fluctuating interest rate changes. If you plan to stay in your home for a while, this is a great benefit to a longer-term mortgage.
- Less frequent renewals
- With a longer-term mortgage you won’t need to renegotiate your mortgage terms and rate as often. Saving you time and potential additional costs.
Cons
- Risk of missing out
- If interest rates go down, you won’t benefit from the lower rates until your term is up. This can be a missed opportunity to lock in at a lower rate and can cause frustration.
- Less Flexibility
- A lot can change in 5 years, and you are committed to the full term of the mortgage. If you need to break your mortgage contract early you will have to pay a penalty. Not all penalties are equal, however some can be quite significant.
To determine the right option for you, consider your short and long term goals, current market conditions, and risk tolerance. If stability and predictability are important, a 5-year fixed rate mortgage might be best. If you value flexibility and the potential for lower interest rates sooner, a 3-year fixed rate mortgage could be a better fit. If your goals and future are uncertain, you may want to consider a variable rate mortgage.
Our expert Advisors are available to assist you in finding the perfect mortgage term for your needs. They understand that the right choice depends on your financial situation and will provide the guidance needed. Don't hesitate to book an appointment with one of our Advisors today.
