Key takeaways:
- There’s more to the best mortgage than interest rates.
- The right mortgage term can save you money.
- Extending your amortization period can reduce your mortgage payments.
- Renewing your mortgage is a good opportunity to tap into your home equity.
- The best mortgage is a strategy that will boost your overall financial plan.
When it comes time to renew their mortgage, many homeowners look for the “best” mortgage. For many, the best mortgage simply means the one with the lowest interest rate. However, the interest rate is only one of several aspects of a mortgage that matter.
For example, you might be considering moving in the next couple of years; in this case, signing on for a five-year term might not be the best option. Or, you might have to accept a higher interest rate than with your previous mortgage term, meaning payments could be considerably higher. In that case, it might be worth considering increasing your mortgage amortization period.
To truly find the best mortgage for your situation, it’s essential to look beyond the interest rate. Let’s examine the other key mortgage features, and why they could be even more important than the interest rate when it comes to keeping your overall financial plan on track.
What is a mortgage term? And how does it affect you?
The mortgage term is how long your current agreement and rate remain locked in with your lender. In Canada, terms can last from six months up to 10 years, with five years being the most common. The best mortgage term for you could be anywhere on that scale.
If you’re planning to stay in your home for the foreseeable future and value predictability, a five-year fixed rate term offers protection from interest-rate fluctuations. However, life can be unpredictable. If there’s a chance you may need to move, refinance or tap into your home equity, a shorter term could be a better option.
Breaking a mortgage before the term is up will usually mean paying a penalty. Depending on your lender and your contract terms, this could run into tens of thousands of dollars. By choosing a shorter term, you can avoid these costly penalties.
The mortgage term also affects the interest rate. For some lenders, three- or four-year term mortgages come with their lowest rates. Some will offer their lowest rate with a five-year term. Typically, all lenders offer considerably higher rates for longer term mortgages, such as seven- or 10-year terms. Therefore, if you think you might sell your home in a couple of years’ time, a two-year mortgage term could save you money in the short and long term.
Why is choosing a fixed or variable rate mortgage important?
With a fixed rate mortgage, your payment stays the same for the entire term, giving you peace of mind and predictable monthly costs. This is a good fit for conservative planners or anyone on a tight budget.
A variable rate mortgage, however, moves with your lender’s prime rate, so mortgage payments could rise or fall during the term. Over the long run, variable rates have often been lower than fixed rates, but they provide less predictability.
Some variable mortgages increase your payment if rates go up, while others keep the payment the same but decrease the amount of principal you’re paying down. It’s important to consider your comfort with risk; the best mortgage shouldn’t cause you to worry every time rates make the news. Find out more about fixed versus variable rate mortgages here.
What is a mortgage amortization period? And how is it important?
Your mortgage term is the length of the agreement with your current lender, but the mortgage amortization period is how long it will take to pay the entire mortgage off. When you renew your mortgage, you usually have the choice to keep your amortization schedule as is or adjust it.
When rates have climbed significantly, it might make sense to increase your amortization period so that your monthly payments are more affordable (the longer the amortization period, the lower the mortgage payments). You could always reduce your amortization period the next time you come to renew your mortgage (if rates have dropped) so you still get to pay off your mortgage in good time.
If your income increases, you might consider shortening your amortization period to pay off your mortgage faster, but only if you’re sure it won’t leave you financially stretched. Sometimes, the best mortgage for you could be one with an extended or reduced amortization period.
Do your mortgage payments fit in with your overall financial plan?
The best mortgage has a level of payments that helps keep your overall financial plan on track (such as being able to consistently save for retirement or keeping your emergency fund growing).
High mortgage payments could badly affect your cash flow and lifestyle, force you to take on more debt or prevent you from investing as much as you need to. Regardless of how low a mortgage interest rate might be, it’s not the best mortgage for you if the payments affect your finances adversely.
You can work out what your mortgage payments will be with this mortgage calculator.
Do the prepayment privileges meet your needs?
Prepayment privileges, found in the fine print of your mortgage contract, determine how much extra you can pay off your mortgage principal without paying a penalty. Many lenders allow you to make additional lump-sum payments (often between 10-20% of the balance) or increase your monthly payment by a specific amount.
If you expect to receive a large bonus, inheritance or salary increase, and paying off your mortgage is a priority, the best mortgage could be one with generous prepayment privileges. They let you pay off significant chunks of your balance ahead of schedule, which can save you a substantial amount in interest. Sometimes, a mortgage with a slightly higher rate but with more flexible prepayment terms can actually cost you less in the long run, especially if you plan to use those options to pay it off faster.
Does your mortgage offer a line of credit?
Not all mortgage lenders offer the option of a home equity line of credit, or HELOC (particularly low-cost, no-frills lenders). However, this can be an extremely useful borrowing option for homeowners.
A HELOC allows you to borrow up to 80% of the value of your home, including your mortgage. You can often borrow large amounts, the interest rates are typically considerably lower than for other types of loans (except your mortgage), and you only pay interest on what you borrow, not what your credit limit is (unlike with personal loans, where you pay interest on the full amount, even if you don’t initially need it all).
A HELOC can be an excellent resource if you need to access money for an emergency or if you need to finance an expensive project, such as a home reno or buy a car. The best mortgage for you could therefore be one that includes access to a HELOC. You can find out more about HELOCs here.
Are you looking to borrow more than your current mortgage balance?
Many people use their mortgage renewal as an opportunity to review their overall debt. If you’re carrying significant high-interest debt (such as credit cards, personal lines of credit or car loans), rolling that into your mortgage can deliver considerable advantages.
The interest rate will almost certainly be significantly lower (3-4% compared to 20% or more for credit card debt, for example), it’s a lot easier to manage one debt rather than several, and you’ll probably free up more of your income by significantly reducing your overall debt payments (meaning you can save more).
If you’re looking to use your home equity to help fund renovations, education expenses or other large-ticket items, the best mortgage for you could be a mortgage refinance. You can find out more about refinancing your mortgage here.
Why a mortgage strategy is the best mortgage
As we’ve seen, getting the best mortgage isn’t just about simply finding the lowest rate; it’s also about getting a mortgage strategy that helps boost your financial plan.
A mortgage strategy takes into account your cash flow, current debts, future income and financial goals, and can make a huge difference to your long-term financial well-being. The best mortgage is a strategy that can help reduce your overall interest payments, free up more of your income and help you reach your financial goals faster. You can read more about mortgage strategies here.
Your IG Advisor will recommend a mortgage strategy that fits in with every aspect of your financial plan. They’ll consider not just the most appropriate interest rate, but also the best amortization period, prepayment privileges, HELOC options and refinance possibilities. In short, they’ll set you up with the best mortgage for you; one that provides you with a strategy that helps you get you to your financial goals faster.
And, unlike with mortgage lenders, your IG Advisor will stay by your side every step of the way, not just once every five years. If you’re about to renew your mortgage, talk to your IG Advisor first and discuss a mortgage strategy that will work for you. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
Mortgages are offered by Investors Group Trust Co. Ltd., a federally regulated trust company, and brokered by nesto Inc. Licences: Mortgage Brokerage Ontario #13044, Saskatchewan #316917, New Brunswick #180045101, Nova Scotia #202507230; Mortgage Brokerage Firm Quebec #605058; British Columbia, Alberta, Manitoba, Newfoundland/Labrador, PEI, Yukon, Nunavut, Northwest Territories.
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