Here is a great source for anyone curious about the different mortgage term options. It was created by the people over at Canadianmortgagetrends.com
Mortgage Term Review
Updated July 6, 2009
Picking a mortgage is like buying a diamond. It’s an expensive purchase; you don’t want to screw it up; and getting started is sometimes bewildering.
The first thing that most folks choose is their
term. Here’s a bite-sized review of several different terms to give you a running start.
Popular Fixed Terms…
1-year fixed: Today’s 2.25%
prime rate has many people craving a variable mortgage. Fight the craving. A 1-year fixed gives you the same low rate, or better. Plus, it doesn’t trap you for 3-5 years in today’s abnormally-high variable-rate premiums.
2-year fixed: Another solid alternative to a 5-year variable. You get an extra year of rate security for just ~0.20% more than a good one-year fixed. If the
BoC hikes rates 1/2% every six months (starting June 2010 or sooner), a good 2-year will probably save you money over a 1-year.
3-year fixed: A solution for people who can’t choose between fixed or variable… You’ll save big interest over the first three years compared to a 5-year fixed. The tradeoff is more risk in years 4 and 5. If fixed rates go up 2% in the next few years, you’ll likely do better with a 5-year term.
4-year fixed: More people are considering 4-years since they’re still under 4% and are 1/4% to 1/2% cheaper than a 5-year fixed. If fixed rates go up less than 2% in four years, a 4-year may be more economical than a 5-year. If you’re risk adverse and prone to breaking your mortgage in four years, get a 4-year fixed to avoid the penalty.
5-year fixed: Still the most popular term. 5-years are just 3/4% above their all-time low. With most “experts” calling for rate hikes in 12 months, you’ll be sleeping easiest in a 5-year.
Longer Fixed Terms…
7-year fixed: 7-year mortgages cost 1% more than 5-year terms, for just two more years of rate assurance. As a result, they don’t sell very well. If you’re that concerned about risk, take a 10-year for the same price.
10-year fixed: The decade mortgage is still available under 5.35%. That’s not much above the recent record low. What’s more, you can get out after five years with a reasonable penalty (no dreaded
IRD). The problem is, you may pay thousands more in interest than a 5-year.
Variable Terms…
5-year closed variable: They say prime isn’t going any lower. So why gamble with prime+ variables? If you want to float your rate, get a convertible 1- or 2-year fixed and wait for “prime-minus” to return.
5-year capped variable: You’ll get 3.25% today and never pay over 5.85%. Sounds okay, but if you’re that worried, why not pay a little more for a fixed rate now?
5-year open variable: Closed variables are portable and have just 3-month interest penalties. Unless you’re going to terminate early, save ~0.40% and go closed.
Other Terms and Features…
5-year $0 Down: Hate em. Lenders pillage borrowers with no-money-down products. If you can’t put down 5%, rent and bank a down payment.
5-year no-frills: If there’s any chance you’ll need over 5% pre-payment privileges, you’ll be sorry for choosing one. If not, you’ll save a smidgen (0.10% or so). As recently as May, discounts on no-frills made them worth considering. At the moment, don’t bother.
Readvanceables: Love’em. They’re the “must have” mortgage if you’ve got 20%+ equity. They make you liquid, and you can’t put a price on liquidity.
More…Open HELOC: : The All-in-One is our favourite at prime + 0.85%. It has interest offsetting and automatic everything. We just wish the
LOC was at prime again, like last December.
Hybrids: A hybrid mortgage is part fixed rate and part variable rate (and/or part long term and part short term). Hybrids offer a nice amount of rate diversification. If you can’t decide between fixed and variable, check them out.
