As a prospective home buyer goes about obtaining the necessary loan to make their purchase, they’ll often weigh their options to the best of their ability to decide which sets of terms are best for them. They might consider adjustable-rate versus fixed-rate mortgages or whether they should lock down an interest rate with their lender. Another hot topic of consideration is how long they want the term of their mortgage to be.
5-year and 10-year mortgage terms are the most common mortgage terms among average consumers. In a fixed-rate mortgage, home buyers are not subjected to the changes of interest rates in the Canadian real estate market. For the entire duration of the mortgage term, they are locked in at one interest rate. But before they put their pen to paper, borrowers must decide if they want to lock that term in on a 5-year or 10-year basis. A local mortgage broker in North York gave us some perspective, here are the two main things you should weight when choosing a mortgage.
Protection Against Rising Interest Rates
5-year mortgage terms used to be the golden standard, and still are, but 10-year terms are becoming more common as home buyers seek to safeguard themselves against rising interest rates. If someone is able to lock in their 10-year mortgage rate at 5% and interest rates rise shortly after, they could very well be saving a significant amount of money.
Many financial experts sing the praises of 10-year fixed-rate mortgages as a way to protect themselves against interest rates that they feel will only increase as time goes on.
When Interest Rates Decrease
However, a 10-year fixed-rate mortgage also means being locked into a higher interest rate if the market sees a decline in interest rates. This means that they could be losing money at any time over the span of their mortgage term, particularly after the first five years are up. If they had opted for a 5-year fixed-rate mortgage instead, they would be able to renew their mortgage at the lower rate if it were still available.
Ultimately, choosing a 5-year or 10-year fixed-rate mortgage term depends entirely on you and your perception of the real estate market. Do you fear or suspect that rates will only climb over the course of five years? What about in ten? Does the volatility of the market and sudden “pops” in increased interest rates alarm you?
Speaking with an experienced real estate lawyer can help even the most uninformed of prospective home buyers gain an understanding of what Canada’s market currently looks like, what it’s looked like in the past, and what projections are expected for the future. With this information in mind, you can make the most informed decision possible about the type of mortgage that you enter into.