When it comes to the question of “what is better” when talking about short-term vs long-term mortgages in Ontario, the answer is “it depends on your situation”. In general, most people who are looking for a mortgage on a new home purchase will prefer a long-term bank mortgage. Banks offer short-term mortgages that usually have lower interest rates, but have less predictable payments over the life of the mortgage. Short-term mortgages from alternative lenders are best suited to people who have immediate financial needs or want the ability to change their mortgage in the near future. Before deciding on a short-term or long-term mortgage it is important to first identify your financial goals.
The Amortization Period and Mortgage Term for a mortgage are often confused. A mortgage term refers to the mortgage’s length before expiring whereas the amortization period refers to the amount of time it will take to pay off the mortgage. In some cases where only the interest on a mortgage is paid, there is no amortization period. Interest-only mortgages are most common with alternative mortgage lenders and are usually used as short-term financing until the borrower can get a cheaper deal with a bank. For mortgages in Canada, the longest possible amortization period is 25 years. The longer the amortization period, the lower the monthly mortgage payments will be.
With the major Canadian banks, a short term mortgage is considered to be 3 years or less. With the major banks, these mortgages typically carry lower interest rates but are likely to have different rates once the term expires and the mortgage is renewed. This is a good option for people who would like a lower-average rate but can easily deal with significant changes in their monthly mortgage payment after renewal. Most Canadians like having predictable mortgage payments, so long-term mortgages are more common for the general population.
With the major Canadian banks, a long term mortgage has a term that is greater than 3 years. Long-term mortgages offer consistent mortgage payments over a long period of time. Having consistent payments helps people budget their household financing and gives a more accurate picture of when the mortgage will be fully paid. With the banks, a long-term mortgage will carry a higher interest rate than short-term mortgages. In Canada, the majority of borrowers opt for a 5-year mortgage term.
When people cannot get a mortgage from a bank, they often turn to an alternative lender. The majority of alternative lender mortgages have a one year term and are considered short-term mortgages. Alternative lenders have lenient lending criteria and include credit unions, trust companies, mortgage investment corporations (MICs) and private mortgage lenders. Most trust companies and credit unions require a credit score of at least 600 while most private lenders and MICs have no credit score or income requirements. Alternative lenders base approvals on the equity in a property, and can lend up to 75% of the property’s value. These lenders charge far higher rates than banks do at interest rates between 7% and 12%. Alternative lenders do not have to follow the same regulations that apply to the banks, which means that they have a much faster application process. This makes alternative lenders a good source of quick emergency financing.
All mortgage types have their advantages and disadvantages and the best option can depend on a person’s financial situation. If you have more than enough money to cover mortgage payments and a large change in your rate won’t impact your ability to make payments, get a short-term bank mortgage. A short-term bank mortgage may also be a good option if you have plans to sell your home or change financing in the near future. On average, short-term mortgage rates are lower and will save you money over time at the cost of less predictable monthly payments. If you cannot afford a dramatic change in your mortgage rate and need a predictable mortgage payment to plan your finances, you should get a long-term bank mortgage. If you are in an emergency situation, such as eviction from a power of sale or foreclosure then a short-term alternative lender mortgage might be best. If you are having difficulty deciding on which kind of mortgage to apply for, you can contact our mortgage team for a free consultation.