Rates aren’t ev­ery­thing: Don’t ne­glect your mort­gage term

Home buy­ers need to pro­tect them­selves against life’s changes, ex­perts say

The Hamilton Spectator - - BUSINESS - CRAIG WONG

You shopped around for the best deal on your mort­gage and weighed the pros and cons of go­ing with a fixed-rate or a vari­able-rate loan.

But an­other key fac­tor to con­sider is the term.

A ma­jor­ity of bor­row­ers opt for a five-year mort­gage — about 54 per cent ac­cord­ing to Mort­gage Pro­fes­sion­als Canada — but ex­perts say home­buy­ers need to con­sider how long they want to com­mit to when it comes to their loan.

James Laird, co-founder of in­ter­est rate-com­par­i­son web­site RateHub, says when peo­ple are buy­ing a house and sign­ing a mort­gage it can feel like noth­ing is go­ing to change for the next 10 or 20 years, so sign­ing for a five-year term may seem like it’s no big deal.

“But life is a bit dif­fer­ent than that,” Laird said, as re­la­tion­ships and jobs can change.

“Some­times it is new re­la­tion­ships form­ing where some­one buys a condo, gets a five-year fixed-rate, but then they meet some­one and get mar­ried ... That usu­ally dic­tates a change in the res­i­dency that they have and the mort­gage is bro­ken.”

“That can re­ally set you back,” he added, not­ing that penal­ties for break­ing a fixed-rate loan will be more se­vere than those for ter­mi­nat­ing a vari­able-rate.

While mort­gages in Canada gen­er­ally have terms of one to 10 years be­fore the re­main­ing bal­ance needs to be re­newed, re­fi­nanced or paid in full, Laird said the av­er­age Cana­dian will only have their mort­gage for 3.8 years.

For those ner­vous that in­ter­est rates are go­ing to be sig­nif­i­cantly higher in five years, it might make sense to take a longer term.

Choos­ing a longer term mort­gage can help pro­tect you if in­ter­est rates rise, Laird says, but the re­verse is also true.

For in­stance, when the rate charged for a 10-year term dropped be­low four per cent in 2012, some bor­row­ers leapt at the chance to lock in at what was seen at the time as a great rate for a decade.

How­ever, Laird says rates con­tin­ued to fall and what seemed like a deal at the time, no longer looked so ap­peal­ing.

Frank Napoli­tano, man­ag­ing part­ner at Mort­gage Bro­kers Ottawa, says the rate dif­fer­ence be­tween a five-year and a 10-year mort­gage has been around 1.5 to two per­cent­age points.

“That’s a big jump in rate, espe­cially in that ini­tial five-year pe­riod, to have to pay just to get that rate for the fol­low­ing five years,” he said.

Mort­gage rates to­day are sit­ting near his­toric lows and while it’s un­likely they will re­turn to the high teens of the 1980s, a move higher five years from now is not out of the ques­tion.

Cana­dian mort­gage lenders raise the money they need on the bond mar­kets and bond yields have risen since the U.S. elec­tion last year, push­ing up the cost of fixed-rate mort­gages.

“Ul­ti­mately, choos­ing the right mort­gage type and term length is a mat­ter of per­sonal pref­er­ence and what op­tion best suits cus­tomers and their per­sonal needs,” says Marc Ku­lak, as­so­ciate vice-pres­i­dent of real es­tate se­cured lend­ing at TD Canada Trust.

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