Get money-saving tips in your inbox.

Stay on top of personal finance tips from our money experts!

News & Resources

Should You Choose a Long or Short Term Mortgage?

April 11, 2016
3 mins
A man signs documents at a table with two women

When most people think about mortgages, they tend to focus almost exclusively on the interest rate. But there are a number of other variables to be considered when choosing a mortgage product that best suits your needs. One of those is the length of the mortgage agreement, better known as the term. Here we review the various options and why you might choose a long or short term mortgage.

Typical Term FAQs

First off, don’t confuse the “term” with the total length of the mortgage: that's the amortization period. Most mortgages are negotiated over a 25-year amortization period, meaning (barring any overpayments) it will be paid off 25 years after the first payment is made. But within that 25-year timeframe, there will be a series of negotiated terms for a set number of years.

The most common mortgage term is for five years, meaning you pay the principal and interest at the agreed rate for five years, then negotiate another five-year term. In Canada, mortgage terms vary from a few months to several years. The longest currently available mortgage term is RBC’s 25-year mortgage.

Should You Make A Longer Term Commitment?

Another common term length is 10 years. All the banks offer a 10-year fixed term, currently ranging from about 4% to 7% interest. While the rate is one or two percentage points higher than a five-year term, the longer time period offers some people the peace of mind knowing that their rate won’t change for a decade.

Paying For Stability

If you look at any bank’s posted rates, you’ll see that the shorter the term, the lower the rate. So if you’re willing to handle some potential instability as rates fluctuate and renegotiate at a more frequent rate, you will have lower monthly premiums and could realize substantial long-term savings.

Breaking Up Is Hard To Do

With interest rates continuing to hover at historical lows, many people have been tempted to break their existing mortgage and sign up for a new one at a lower rate.

However, breaking a mortgage comes at a cost. Your lender will charge you a penalty to do so, using the higher of two calculations: either three months’ interest payments or by using what’s called an “interest rate differential.” An IRD is a difference between your original rate and what the same mortgage is currently available for.

Is It Worth Switching To A Lower Mortgage Rate?

Just remember that your lender will charge you whichever of the two figures is higher. With the penalty figure in hand, you can compare how much interest you’ll pay over the remainder of your current mortgage, and how much you’d pay over the same amount of time at a lower interest rate.

If the interest savings add up to more than that cost of the penalty, then it may be worth it to switch. But before you do, check carefully to make sure there aren’t any administrative, legal, or other fees that might wipe out the potential savings.

Allan Britnell

Toronto-based freelancer Allan Britnell is an award-winning writer with nearly 20 years’ experience. He covers a diverse range of topics, including DIY and professional home renovation projects, nature and the environment, small business, personal finance, and family and health issues. He is also the managing editor of Renovation Contractor, the publication written for small- and medium-sized contracting and custom home building companies. He lives in Toronto with his wife, two daughters, and their dog, Oscar.

Latest life insurance articles

10 Life insurance myths debunked
Life insurance is for someone older or has kids, right? Wrong. Let’s debunk life insurance myths and learn why everyone needs some form of coverage.
6 mins read
Do you need life insurance? A primer for Canadians
Life insurance isn’t a one-size-fits all solution. But if you have dependents, it can be an important financial safety net for those you love.
7 mins read
Why life insurance should be part of estate planning for new parents
Life insurance is one of the best ways new parents can protect their family and help loved ones in the event of your unexpected death.
5 mins read

Subscribe to our newsletter

Stay on top of our latest offers, relevant news and tips!

Thanks for joining!

You'll be hearing from us shortly - stay tuned.