How to Pay Off Your Mortgage Faster with the Right Term
Choosing the most suitable term is more vital than even finding the lowest mortgage rates or features found in your mortgage contract. Finding the best term can protect you from being locked into a punitive rate or from increasing rates if you neglected to lock yourself in for a sufficiently longer term.
What is meant by a mortgage “term?” It simply refers to the actual length of the contract for your mortgage. The most popular term selected by over 50 percent of Canadian mortgage borrowers is the 5 year fixed term.
However, keep in mind that simply because a 5 year fixed is more popular doesn’t necessarily mean it’s right for your particular situation. The reason is that the ideal term will vary and is dependent according to how interest rates change and to your specific financial predicament.
For example, in just the last 2 months alone, some of the longer-term fixed rates have increased by as much as half a percentage point which has made some terms less appetizing.
Here are some of the best and worst terms that are currently found on the mortgage circuit.
Best Current Term Mortgages
1. Four-year fixed Term
You will find many four-year fixed rates which are still below 3 per cent. With this term you can save yourself almost as much as a third of a percentage point than the interest which you would find on a five-year fixed term.
This could mean a savings as much as $2,000 over 4 years on a mortgage worth $2,000.000. Although a 5 year term might give you an extra year of protection from a rate increase, you are also more likely to have pay a penalty should you to decide to renegotiate or break from your mortgage before the term expires.
You could take a 4 year term and renew into a 1 year term so that you still get 5 years protection from rate increases and greater flexibility.
2. One-year fixed Term
Many lenders don’t push the one year term because of their low margin but they can be very handy in certain circumstances. One reason is that they have extremely low rates and are presently at around 2.39 percent. They can be a very suitable choice for people who have less than 15 years on their mortgage and are willing to take the risk that rates will continue to remain low.
A 1 year term can also be a suitable alternative for a variable rate.
Terms to Avoid
Here are some terms you presently avoid.
1. Five-year variable Term
Although you might save as much as 0.40 percentage points with this term versus a four-year fixed term, you also lose your rate protection which might be important come 2015.
2. Three-year fixed Term
If your not planning to break your mortgage in three years, then you should select something else because the 0.10 percentage points you could save from a four-year fixed term might be offset by higher rates when you go to renew.
3. Seven-year fixed Term
From a math perspective a 7 year term has always been considered a poor choice because you really can’t justify the premium rate, and if you are concerned about whether inflation will raise interest rates that it might well be worth while to pay another 1/10th of a percentage point and get yourself a 10 year term instead.
Choose your Term Wisely
In some instances you might not even qualify for some of these terms and it a lot depends on your individual and future financial circumstances when it comes to a renewal. The bottom line is that you should spend as much time picking the most suitable term for your needs as you do in choosing interest rates.