With Rates So Low, What's the Best Mortgage Term Right Now?

What is a mortgage term?

A mortgage term is the length of time you choose to sign on with a particular lender, whether that’s a major bank, credit union or private mortgage investment corporation.

The amortization, on the other hand, is the total number of years it will take to pay off your mortgage. The most common amortization in Canada is 25 years. Over that span of time, you will spend multiple terms with various lenders — or keep renegotiating with the same lender, if you want.

A term can range from anywhere between six months and 10 years, though five years is by far the most common. All of the conditions of your agreement with the lender will last for the entire term, including your interest rate.

Lengthier terms usually come with higher rates, because you’re protecting yourself from big interest rate hikes for a longer period of time. It’s not always so simple, though; sometimes market conditions will see lenders charge a premium for a shorter term.

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What’s the right term while rates are so low?

“The answer is different for every homebuyer,” says Jesse Abrams, co-founder and CEO of Homewise, an online mortgage brokerage based in Toronto.

For homeowners who don’t plan to move within the next five years, Abrams says a longer term is a better choice because five-year rates are incredibly low right now.

They’re usually a bit more expensive than shorter terms, but you’ll score a dependable rate and payment that won’t fluctuate with today’s uncertain economy. The benefit that has on your budgeting can’t be overstated.

The other advantage to a longer term is that it can survive a big or surprising life change. For example, if you lose your job or decide to take a break for a year, you won’t have to sweat through a renewal process and prove that you’re a qualifying borrower while your income is on hold.

If you don’t think you will be living in your home for more than three years, Abrams says it’s better to choose a shorter term.

When you move, you may have to break your agreement with your lender early. Depending on how much time you have remaining in your term, the penalty for doing so can be up to 4% of a mortgage with a fixed rate. On a $500,000 mortgage, that would be $20,000.

To help you compare the costs of different terms, here’s a hypothetical snapshot of a fixed-rate mortgage courtesy of Homewise.

The scenario: A high-ratio buyer making a less than 20% deposit on a $500,000 mortgage for a home worth less than $1 million.

If an insurable buyer is making a greater than 20% deposit, the numbers shift a bit:

What’s the best term when interest rates go higher again?

Generally speaking, if rates are low, choose a longer term so you can hold on to that deal for as long as possible. When rates are high, shift to a shorter term so your renewal will come up in time to take advantage of low rates once they come around again.

Abrams cautiously suggests that once interest rates go over 3.5%, it may be time to consider a shorter term with a variable mortgage so you can easily refinance once rates trend down again.

One advantage of a variable rate over a fixed one is a lower penalty for breaking your agreement early: generally three months of interest or about 0.5% of your mortgage balance. On a $500,000 mortgage, that would be $2,500. With an upfront cost that low, you’ll have a much better chance of finding savings by making a switch.

Remember, Abrams says, choosing a mortgage isn’t all about landing the best rate. You also want to consider features that can make life easier and less expensive in the future.

For example, an open or flexible mortgage often has a higher rate, but you’ll be able to pay it down as fast as you want without costly penalties. And portable mortgages will let you bring your term to your new home instead of paying the high price of breaking your agreement.

To find the mortgage that works best for your situation, try asking Homewise to work the market for you. The brokerage will negotiate on your behalf with more than 30 big banks and other lenders, completely free, and it only takes five minutes to apply.