Short-Term vs. Long-Term Fixed Mortgages

blog-hero

Finding the perfect mortgage can feel like embarking on a journey into the unknown. With so many different options, learning the various terms and how they best fit your situation can feel overwhelming — and that’s okay! In this article, I’ll help you discern the differences between short-term and long-term fixed mortgages and outline the advantages and disadvantages of each to help you make an informed decision.

Understanding Fixed-Rate Mortgages

A fixed-rate mortgage is a type of home loan where the interest rate remains the same for an agreed period, called the term. This means that your monthly payments will remain constant.

This option differs from a variable-rate mortgage, which involves interest rates rising or falling depending on market conditions. With fixed rates, you don’t have to worry about these fluctuations.

Benefits of a Fixed-Rate Mortgage

One of the most significant advantages of fixed-rate mortgages is that they allow you to plan your finances with certainty. Knowing the exact amount you need to pay each month helps you budget accordingly and eliminates the looming fear of unexpected payment increases. This stability can be especially helpful for:

  • First-time homebuyers navigating their new financial responsibilities
  • Those who have a tight budget
  • Those with particular financial goals who want to budget effectively

How are Interest Rates Determined for Fixed-Rates Mortgages in Canada?

Interest rates for fixed-rate mortgages are influenced by various factors, including:

  • The Bank of Canada’s policy rates
  • Inflation rates
  • Economic conditions
  • Other market forces

Generally, fixed-rate mortgages are tied to Government of Canada bond yields — when bond yields rise, mortgage rates also tend to increase, and vice versa. It’s essential to keep in mind that interest rates can vary among lenders, so shopping around can help you get a better picture of the most competitive rates.

Short-Term Fixed Mortgages

Short-term fixed mortgages are loans with brief terms, typically one to three years. During this period, the interest rate will remain fixed, which provides certainty and stability to your monthly mortgage payments. At the end of the term, you’ll get to renew your mortgage agreement, at which time the interest rates may change.

Advantages of Short-Term Fixed Mortgages

  1. Lower interest rates: Short-term fixed mortgages often come with lower interest rates than their long-term counterparts because lenders face less risk and can have more confidence about near-future market conditions.
  2. Flexibility in refinancing or renegotiating rates: With a shorter term, you can re-evaluate your interest rate sooner, which is particularly beneficial if interest rates are projected to decrease.
  3. Suitable for those planning to sell or refinance soon: By opting for a shorter term, you can align your mortgage with your anticipated timeframe to sell or refinance, avoiding potential penalties or fees associated with breaking a longer-term mortgage.

Risks of Short-Term Fixed Mortgages

  1. Vulnerability to interest rate fluctuations at renewal: While short-term fixed mortgages offer lower interest rates, they come with the risk of an increased rate at the time of renewal.
  2. Uncertainty upon renewal: Since interest rates can change at renewal, it may be challenging to budget and plan for future mortgage payments and other goals.

Long-Term Fixed Mortgages

Long-term fixed mortgages provide a fixed interest rate throughout your mortgage term, typically ranging from five to fifteen years or more.

Advantages of Long-Term Fixed Mortgages

  1. Protection against potential rate increases: Market conditions can change, especially throughout an extended period, so locking into one rate can protect against these fluctuations.
  2. Stable and predictable monthly payments: Knowing that your mortgage payments will remain the same in the long run allows for easier financial planning and budgeting. 
  3. Suitable for those prioritizing financial stability: This option is ideal for long-term planners because the certainty of fixed payments can align better with your goals.

Drawbacks of Long-Term Fixed Mortgages

  1. Higher interest rates: Lenders face more risk since these mortgages come with a longer-term commitment. To mitigate this, they often set interest rates higher than short-term mortgages.
  2. Limited flexibility to refinance and renegotiate: Since you’ll be locked in over a longer period, you can’t renegotiate your rates without penalty until renewal. So, if interest rates decrease significantly during your term, you’ll miss out on these savings.

Considerations for Prospective Homebuyers

When choosing between short-term and long-term fixed mortgages, it’s essential to consider the following:

  • Your financial situation and goals will help you determine your comfort level with mortgage payments and potential interest rate fluctuations.
  • Future housing plans: Do you plan to stay in the same home for a long time, or do you want to move in the next few years? Understanding your timeline can guide you to the correct mortgage term.
  • Get personalized advice and guidance: Seeking the advice of a broker can help you make the right decisions.

Need Help Deciding? That’s Why I’m Here!

One of the best ways to gain clarity about the mortgage landscape is to reach out to me. We can evaluate your current financial situation, goals, and plans and decide which option is best for you. As a mortgage broker, I’ll shop around on your behalf to ensure you’re getting the best rates possible.

Short-Term vs. Long-Term Fixed Mortgages
andrew thake about

About Andrew Thake

Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.

Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.

Why not make your mortgage experience a comfortable one?

Book an Appointment
Icon-Andrew-Thake
chevron-down