Short vs. Long term mortgage - What is best for you?

Almost every time that I arrange a mortgage for one of my clients they ask me whether they should go with a shorter or longer term.

My answer: for some people having a long-term mortgage makes a lot of sense, for others a short-term mortgage will best meet their needs.

Of course there is no one right answer here.

When you are selecting the term for your mortgage it is important to recognize that generally the longer the term of your mortgage, the higher the interest rate.

A good way to think of the difference between a short vs. a long-term rate is an insurance premium. The financial institution generally wants to be compensated by you in order to be compensated by you in order to guarantee the rate of your mortgage over a longer period of time. What you have decided is whether or not the insurance premium (difference between short vs. long term rates) is worth paying in your circumstances.

Many people have heard the theory that you are better off to keep on renewing with short terms and paying down your mortgage. This philosophy has held true in the past provided that the extra amount that you save from selecting a short term is applied to reducing your principle mortgage balance outstanding.

There is potential to gain by using this method, but you are also exposed to risk that rates could be substantially higher by the time you have to renew.

Many of the consumers in today’s market are buying homes with 5% down and extending their debt servicing to extreme levels. While I believe that the dream of home ownership is a very fulfilling and a worthwhile pursuit, I caution that you should do your financial planning carefully.

It is important to realize that interest rates today are at near historical lows. Many people who can afford homes today would never have been able to make that purchase at the interest rates of five years ago.

It is critical that you understand the following: YOU REPAY VERY LITTLE OF YOUR PRINCIPAL BALANCE IN THE FIRST FEW YEARS OF YOUR MORTGAGE.

This means that the people who are in jobs that will likely see very little pay increase over the next few years should definitely consider the consequences. Historically, over the last 30 years the average five-year mortgage rate has been approximately 11%.

Ask yourself this question: if mortgage rates are at 11% when you have to renew- will you be bale to afford to keep your home?

If your answer is a comfortable yes, then I suggest that you pick the term that you feel happy with.

If your answer is even possibly no, then find as long term as possible. By the time a 10 year term comes up for renewal you will at least have paid a large portion of your principal off, and may be able to extend your financing over a longer term in order to make your payments more affordable.

If the property you are financing is being used, or is going to be used as an investment property then again the longer-term mortgage product also makes sense.

Remember there is no mortgage product that can be all things to all people. Make sure you get informed and find the product that best meets your needs. Until next time, best of luck finding your mortgage and home.