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Find your Best Mortgage Term in Canada

Everything Canadians need to know about mortgage terms – Compare options from 6 months up to 10 years and choose the ideal length based on your financial goals, plans, budget and outlook.

Selecting the ideal mortgage term is one of the most critical decisions when financing your home. The mortgage term refers to the time that the conditions of your mortgage agreement with a lender are in effect. The term you choose will impact multiple aspects of your loan, including the interest rate, flexibility, budgeting, and more.

This comprehensive guide will walk you through everything you need to know to choose the best mortgage term in Canada for your unique situation.

Mortgage Term Basics

A mortgage term is the length of time your mortgage contract is in effect. It means a predetermined time for the specific conditions laid out in the contract to be fixed, including

  • Interest rate
  • Payment schedule
  • Prepayment options
  • Penalties for early cancellation

Short-term mortgages have terms of 1-3 years, offering more flexibility but need more payment stability. Long-term mortgages have terms of 5+ years. They provide more payment stability but less flexibility.

Mortgage terms should be distinct from the amortization period, the full timeline for paying off the mortgage, usually around 25 or 30 years. Borrowers often have numerous terms with various lenders throughout the total mortgage amortization schedule as they periodically renew agreements.

Once the set term expires, the mortgage holder must renew the agreement potentially under new terms, pay off the remaining principal in full, or refinance the balance into a new mortgage.

Standard Mortgage Terms in Canada

Now that we’ve covered how to choose a term let’s explore the most common mortgage terms available in the Canadian market.

Standard Mortgage Term in Canada
Standard Mortgage Terms in Canada

3-Year Mortgage Terms

3-year terms are best for borrowers wanting flexibility and who can handle some uncertainty. Or those who expect rates to decrease in the short-term. Here are the key features:

ProsCons
Lower ratesLess payment stability and budget predictability
Take advantage of rate dips sooner at renewalMore exposed to rate increases at renewal
Lower early repayment penalties if break term earlyMust renew (and pay fees) more frequently
Pros and Cons of 3-Year Mortgage Terms

5-Year Mortgage Terms

5-year term is the most common in Canada, 5-year fixed mortgage rates represents over 50% of new mortgage issued [Source].

It is best for borrowers who value payment stability and can stay put for 5+ years and in situations where rates are anticipated to increase in the near term

ProsCons
More payment stability and budget predictabilityRates usually 0.2-0.4% higher than 3-year terms [Source]
Lock in current low rates if expected to riseLarge early repayment penalties if break term early
Avoid frequent renewals and repricingMiss out on rate drop savings during term
Pros and Cons of 5-Year Mortgage Terms

10-Year Mortgage Terms

10-year terms appeal to a smaller subset of borrowers. It is best for borrowers who know they will stay put for the full term and want maximum payment stability. Also, those confidence rates will rise consistently over 10 years.

ProsCons
Lock in very stable payments for 10 yearsHighest interest rates among mainstream options
Avoid most rate repricing risk during termSeverely penalized for breaking term early
Lowest renewal fees over full amortizationMiss out on rate drop savings for full 10 years
Pros and Cons of 10-Year Mortgage Terms

Other Mortgage Terms Available in Canada

In addition to the popular 3, 5, and 10-year terms, some other options exist in Canada:

Term LengthOverview
6-month termsOffer maximum flexibility but also expose you the most to rate fluctuations.
1-year termsProvide flexibility with slightly more stability than 6-month terms.
18-month termsA mid-point between 1 and 2 years.
2-year termsOffer flexibility with more stability than 1 year terms.
3-year termsA common choice providing balance of flexibility and stability.
4-year termsLonger stability than 3 years with competitive rates.
5-year termsThe most common term length, balancing rates, stability and flexibility.
7-year termsProvide an extended rate lock-in between 5 and 10 years.
8-year termsOffer stability similar to 10 years but with slightly better rates.
10-year termsMaximum payment stability but least flexibility.
15-year termsUncommon but offer longer rate lock-in than 10 years.
20-year termsExtremely long term provides highest payment stability.
25-year termsEssentially locks in mortgage rate for remainder of amortization.
Other Mortgage Terms in Canada

Factors to consider when choosing a Mortgage term in Canada

Factors to consider when choosing a Mortgage term
Factors to consider when choosing Mortgage term

Interest Rate

The prevailing interest rate environment and outlook should significantly influence your mortgage term decision. Generally, shorter-term mortgages have lower interest rates than longer terms. This is because shorter terms have added risk and administration fees associated with more frequent renewals.

Here are some guidelines:

  • If rates are low and expected to rise, choose a longer 5+ year term to lock in a low rate for more years.
  • If rates are high and forecasted to fall, go with a shorter 1-3 year term. You can renew at lower rates later.
  • Compare today’s rates across terms. Sometimes, shorter terms offer sizable discounts that outweigh the benefits of longer terms, even if rates rise moderately.
  • Work with a mortgage broker who can forecast rate movements and identify deals across terms and lenders.

Your Future Plans

Your future housing plans should also dictate your ideal mortgage term. Consider:

  • If you may sell or move within 3-5 years, go with a shorter term. This prevents early repayment penalties that come with breaking longer terms.
  • If you plan to stay put long-term, choose a longer 5+ year term to lock in stable payments for more years.
  • Job relocations or growing families are key reasons Canadians sell earlier than expected. Over 60% moved before they thought they would. Account for uncertainty.

For example, if you’re likely to need to sell or move within a couple of years, a shorter 1-year to 3-year term provides flexibility. Even if you stay put, you can renew it for a longer term later.

Appetite for Risk and Change

Evaluate your appetite for taking on interest rate risk and frequent mortgage renewals:

  • Shorter terms allow you to take advantage of dips in interest rates at renewal but increase exposure to rising rates.
  • Longer terms provide payment stability by locking in rates for more years but reduce flexibility.
  • If you prefer set payments that are easy to budget for and you value stability, lean towards longer 5+ year terms.
  • If you are comfortable with some uncertainty and want flexibility, shorter 1 to 3-year terms allow you to capitalize on rate decreases.

Longer terms often make sense for cautious borrowers who prioritize certainty. However, beware of high prepayment penalties.

Upfront Costs and Penalties

Other factors to weigh are upfront mortgage fees and potential penalties for breaking your term early:

  • Shorter terms often allow lenders to offer lower rates in exchange for more frequent renewals.
  • Breaking longer terms early triggers substantial prepayment penalties – often tens of thousands of dollars.
  • Make sure to account for any rate discounts, lower fees, or “cashback” perks offered on certain terms by lenders.

While short terms have higher renewal fees, they avoid the hefty penalties of breaking longer terms. Just be sure your savings exceed added renewal costs.

Ongoing Costs and Cash Flow

Compare both your upfront and ongoing costs across terms:

  • Longer amortizations or terms lower monthly payments but increase total interest costs over the full mortgage.
  • The most expensive component of any mortgage is interest. Even small rate differences compound significantly over 25+ years.
  • Take a mortgage stress test to see if your budget can handle potential payment increases when renewing shorter terms, especially if rates rise.

While shorter terms often have cheaper rates, budget for the possibility of increases at renewal and ensure your cash flow can stomach potential payment shocks.

Tips for Getting the Best Rate on Your Chosen Term

To find the lowest rate on your chosen mortgage term, here are some tips:

  • Shop around and get quotes from multiple lenders and brokers to access the widest variety of rates.
  • A mortgage broker can be invaluable for sourcing deals from niche lenders you may not be aware of.
  • Maintain a solid credit score over 760 to qualify for the best-advertised rates .
  • Consider negotiating with multiple lenders if you have competing offers.
  • Watch for limited-time discounts and cash back offers from lenders on certain terms. An experienced broker will know when these deals are available.
  • Bundle your mortgage, insurance, banking and other services with one provider for cross-product discounts.

Strategies for Different Situations

Strategies for Different Situations
Strategies for Different Situations

The best mortgage term aligns with your unique situation. Here are tips tailored to different scenarios:

If You Expect to Move Soon

Since most Canadians move sooner than expected, opt for shorter terms if relocation is possible within 3-5 years. For example:

  • Choose a shorter 1-3 year term to maintain flexibility.
  • Avoid lock-in and large prepayment penalties of longer terms.
  • Monitor the market – you can always renew it for a longer term later if you stay put.

If You Plan to Stay Long-Term

For borrowers who confidently expect to remain in their home for 5+ years, longer terms make sense. For instance:

  • Lock in a competitive rate now with a 5-year or 10-year term.
  • Enjoy payment stability and budgeting predictability.
  • Avoid frequent renewals and repricing risk.

Just be cautious of high prepayment penalties for breaking terms early.

If You Want Flexibility

For maximum flexibility, as your life and plans evolve, shorter 1-year to 3-year terms allow you to adjust more frequently. Consider:

  • Revisit mortgage features and rates more often at renewal.
  • Take advantage of dips in interest rates as they occur.
  • Customize your home financing as needs change.

The tradeoff is increased uncertainty if rates rise at renewal.

If You Value Payment Stability

Borrowers who dislike uncertainty and want maximum budgeting predictability should gravitate to longer terms of 5+ years. For instance:

  • Lock in mortgage costs for an extended period.
  • Eliminate concerns over rate spikes at renewal.
  • Avoid administration hassles of frequent renewals.

Just prepare for hefty early repayment penalties if your plans change.

What Happens at the End of a Mortgage Term?

When your mortgage term expires, you have three main options:

  1. Renew with your existing lender: You can sign a renewal agreement to re-commit to a new term and rate. Your lender is not obligated to renew with you.
  2. Refinance with a new lender: You can shop around and refinance into a new term and rate with a different lender. This allows you to secure better market rates.
  3. Pay off the remaining balance: If you have funds available, you can pay off the mortgage principal still owing and terminate the mortgage.

Most Canadians renew their mortgage when the term expires. But it’s an opportune time to reassess rates and options. Work with a broker to explore your alternatives.

Consequences of Breaking Mortgage Terms Early

Sometimes, circumstances necessitate breaking your mortgage term before it expires. This may trigger significant prepayment penalties, including:

  • Three months of interest penalties on fixed-rate terms longer than five years.
  • Interest rate differential (IRD) penalties are penalties for breaking shorter and variable rate terms. This compensation compensates your lender for lost interest due to early payout.
  • IRD penalties can amount to tens of thousands of dollars. For example, penalties on a $300,000 mortgage often range from $4,000 to $15,000.

Consider alternatives like porting your mortgage to a new property to avoid breaking your term. But if unavoidable, prepare for substantial penalties.

Conclusion: Which Mortgage Term is Best in Canada?

So, which mortgage term is the best choice for Canadian home buyers? The truth is that it depends entirely on your situation and priorities. Choosing your mortgage term involves carefully weighing interest rates, flexibility, fees, risks, timelines, and more. There is no one-size-fits-all best term – you need to fully assess your personal financial situation, goals, and outlook.

Here are a few rules of thumb:

  • If you move within 3-5 years, shorter 1-3 year terms provide flexibility.
  • If staying put for the long run, 5-year or 10-year terms offer stability.
  • If you want to capitalize on near-term rate dips, go for the shorter term.
  • If concerned rates will climb soon, lock in longer terms now.

To find your ideal term, the best approach is to consult an expert mortgage advisor who can objectively assess your unique needs and circumstances. At Best Mortgage Online, our experts can match you to the perfect term length whether you prioritize low rates, flexible features, or set budgeting.

Don’t leave it to chance – Partner with experts at Best Mortgage Online to maximize your savings!

FAQs

How do I know which mortgage term to choose in Canada?

Consider your financial goals, future housing plans, risk tolerance, and rate expectations. A mortgage broker can advise you on the best term to suit your needs.

What is the most popular mortgage term in Canada?

The 5-year fixed rate term is the most popular, representing around 50% of all new mortgages. It balances flexibility and stability.

Should I get a shorter or longer mortgage term in Canada?

Shorter terms offer flexibility, while longer terms provide payment stability. Weigh your priorities and plans.

What is the shortest mortgage term available in Canada?

The shortest term is six months, but it carries the highest rate of uncertainty. 1-year and 2-year terms also provide flexibility.

Can I negotiate my mortgage interest rate and term in Canada?

Yes, you can negotiate directly with lenders or work with a broker who can advocate and source deals on your behalf.

Which mortgage term has the lowest interest rates in Canada?

Generally, 3-year and shorter terms offer the lowest rates, followed by 5-year and longer terms.

Can I switch mortgage lenders at renewal in Canada?

Yes, your term expiry is an opportunity to shop rates and switch lenders to secure a better deal.

What is the longest mortgage term in Canada?

The longest term is typically ten years. A few lenders may offer 15, 20, 25 or 30-year terms for maximum stability.

How mortgage terms affect interest rates in Canada?

Shorter terms often come with lower rates compared to longer-term mortgages.

Can I pay off my mortgage before the term expires in Canada?

Yes, but penalties apply. Consider porting to a new property instead to avoid penalties if moving before term maturity.

Article Sources

At Best Mortgage Online, the statistics we cite come from trusted governmental and industry organizations to guarantee accuracy.

  1. Mortgage terms and amortization – canada.ca
  2. 3, 5 or 10 years? How to decide which mortgage term Is right for you – money.ca
  3. A Guide to Mortgage Terms in Canada – ratehub.ca
  4. What is a Mortgage Term? – firstfoundation.ca

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