Short vs Long Mortgage Term Strategy | Canada Guide

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Mortgage Term Strategy: Short vs Long

Choosing the length of your mortgage term is a strategic decision that directly influences the total cost of your loan, the flexibility of your contract, and your exposure to interest rate risk. In Canada, borrowers have access to a range of terms from 6 months to 10 years, each with its own characteristics and trade-offs.

Available Terms in Canada

6 months and 1 year: ultra-short terms offering maximum flexibility and often the lowest rates, but requiring very frequent renewal. Ideal during high-rate periods with anticipated decreases.
2 years and 3 years: short terms offering a good balance between advantageous rates and reasonable renewal frequency. Popular when borrowers plan to sell or refinance in the medium term.
5 years: the Canadian standard term, chosen by the majority of borrowers. Offers a balance between stability and rate competitiveness. Most lender promotional offers target this term.
7 years: an intermediate term offering more stability than 5 years but at a higher rate. Less common and offered by a limited number of lenders.
10 years: the longest term available in Canada. Offers maximum stability but at a significantly higher cost. Unique advantage: after 5 years, penalty-free repayment with 3 months' notice under the Interest Act.

Short-Term Strategy (1 to 3 Years)

The short-term strategy involves systematically choosing 1 to 3-year terms to benefit from generally lower rates and renegotiating more frequently. This approach assumes that savings from lower rates will offset the risk of renewing in a potentially higher-rate environment. It suits borrowers who actively monitor the market, have good risk tolerance, and possibly plan to sell their property within the next few years.

Long-Term Strategy (5 to 10 Years)

The long-term strategy prioritizes stability by locking in a rate for an extended period. The borrower accepts paying a slightly higher rate in exchange for budget certainty. This approach is particularly relevant during historically low rate periods when the borrower wants to protect an advantageous rate for as long as possible, or for borrowers with tight budgets who cannot afford payment increases.

How to Choose: Key Questions

Evaluate your holding horizon: do you plan to sell, move, or refinance within the next 1 to 3 years? If so, a short term minimizes the risk of costly penalties.
Analyze market conditions: are rates historically high or low? Does the market anticipate increases or decreases? Your AMF-certified broker can provide this analysis.
Calculate your flexibility: can you absorb a 1% to 2% rate increase at renewal? If so, a short term can be advantageous. If not, favor a longer term.
Evaluate potential penalties: if your life circumstances could change (divorce, transfer, job change), a short term or open mortgage offers more flexibility at lower cost.
Consult your AMF-certified mortgage broker: an independent broker can compare offers from dozens of lenders and recommend the optimal term based on your complete profile.

Frequently Asked Questions

What is the difference between the term and the amortization?

The term is the duration of your mortgage contract (for example, 5 years), after which it is necessary to renew. The amortization is the total expected duration to fully repay the loan (usually 25 years). You will therefore have several successive terms before fully paying off your mortgage. At each term renewal, you renegotiate your rate and conditions.

Why is the 5-year term the most popular in Canada?

The 5-year term offers a good balance between stability and cost. It is long enough to provide meaningful budget predictability, but not so long that the rate premium is prohibitive. Additionally, most mortgage products and lender promotions are designed around the 5-year term, making it very competitive.

When is a short term (1 to 3 years) advantageous?

A short term is advantageous when rates are high and the market anticipates decreases (you can renegotiate at a better rate sooner), if you plan to sell or move in the near term, or if you want to reduce the risk of high penalties in case of early repayment. Short terms have historically offered lower rates than 5-year terms.

Is the 10-year term worth it?

The 10-year term offers maximum security but at a higher cost. It may be worthwhile if you want absolute budget stability over a long period. In Canada, a unique advantage of the 10-year term: after 5 years, you can repay your mortgage without penalty by giving 3 months' notice, under the Interest Act. Rates are, however, significantly higher than a 5-year term.

Can I combine different terms?

Yes, some lenders allow you to split your mortgage into portions with different terms (for example, one portion at 2 years and one at 5 years). This strategy diversifies your renewal risk. However, it can complicate loan management and limit your mobility to other lenders. Consult your AMF-certified mortgage broker to evaluate this option.

What happens at the end of my term?

At the end of your term, it is necessary to renew your mortgage. You can stay with your current lender or shop around with other lenders for a better rate. If you switch lenders, it is essentially a new loan with possible new fees. Your mortgage broker can help compare offers and negotiate the best conditions at renewal.