*This post was created in collaboration with Mortgage Maestro.
Homeowners with mortgage terms coming due soon could be faced with significantly higher mortgage payments when they renew.
By the end of 2026, just about every mortgage holder who took out a home loan before the Bank of Canada started increasing its policy rate will be up for renewal. Considering how much rates have increased since then, the odds are that the majority of mortgage holders will renew at a much higher rate.
Whether you’re buying or renewing an existing mortgage, you’ll need to choose a new term. If you’re leaning towards a fixed-rate mortgage, should you opt for a 3-year or a 5-year term?
That depends on several factors. In this article, we’ll discuss each option, their pros and cons, and how to decide which mortgage makes the most sense for you.
Key Points
- Shorter-term mortgages allow you to take advantage of interest savings if rates are expected to dip shortly.
- Longer-term mortgages allow you to lock in at a low rate today if rates are expected to rise shortly.
- Industry experts anticipate sight dips in interest rates over the next few years, with more pronounced declines among variable rates.
What Will Interest Rates Be Like In The Next Few Years?
We’ve seen rates soar over the past couple of years after a few months of record lows in 2021. But mortgage rates are expected to plateau and potentially even dip over the next few months and years.
After several back-to-back policy rate increases by the Bank of Canada and months at 5.0%, the latest report in October 2024 saw the key interest rate decreased to 3.75%.
It’s worth noting that the Bank of Canada doesn’t set mortgage interest rates. However, it does have some effect on them. So any dips in rates by the Bank of Canada could suggest the same for mortgage rates.
Interestingly, variable-rate mortgages are expected to dip lower than fixed rates over the next few years, experts suggest. If this happens, mortgage holders could save a lot more money by going with variable-rate mortgages.
Should You Choose A Shorter Term For Your Mortgage In 2024?
Both short- and long-term mortgages have their upsides. The one you choose will depend on the market and your specific needs.
3-Year Term Benefits
- Lower interest rates. Shorter terms usually come with slightly lower rates than longer terms, which means you’ll be saving money in interest over the term by opting for a 3-year term over a 5-year term.
- More flexibility. Committing to your mortgage for 3 years instead of 5 means you can renegotiate the terms of your mortgage much sooner. This may be especially useful if you expect rates to dip sometime soon or if you’re not comfortable with a longer-term commitment.
- Lower penalty fees for early repayment. If you sell your home or decide to pay off your mortgage early, you’ll likely be charged early repayment penalties. However, these fees are typically a lot lower on a shorter term than on a longer term.
Ultimately, a 3-year term may be ideal if mortgage interest rates are expected to fall soon. It’s also a good option if you like the idea of having more flexibility to renegotiate your mortgage or have the intention of selling your home sooner rather than later.
5-Year Term Benefits
- More stability. When you lock in a 5-year term, your interest rate and mortgage payments will not change throughout the loan term. This will keep your payments more predictable, which simplifies budgeting. Plus, more consistent payments might be better suited for you if you prefer more financial stability and fewer surprises.
- Hedge against fluctuating rates. If there’s a good chance that mortgage interest rates will increase at some point during your loan term, locking in at a lower rate for a longer period will protect your mortgage payments from increasing.
- Less frequent renewals. A 5-year mortgage term means fewer renewals compared to a 3-year term. Not only will this save you time, but it can also save you money depending on the market climate when it’s time to renew.
You may want to choose a 5-year mortgage term if you think rates will increase soon or if you prefer more stable and predictable mortgage payments. It may also be ideal if you plan to stay put in your home for a long time.
What Are The Cons Of A 3-Year Term Vs 5-Year Term?
Both 3- and 5-year terms have plenty of perks, but there are also a handful of drawbacks to each that you should understand before choosing between the two:
3-Year Term Drawbacks
- More exposure to market changes. If you manage to snag a low rate, you’re only locked in for 3 years. If interest rates are expected to increase over the next few years, you could risk facing a higher rate when it’s time to renew your mortgage.
- More frequent renewals. This can be a perk or a drawback, depending on your situation and the market. But if you don’t want to be bothered having to renegotiate your loan term and interest rate often, then a shorter 3-year term may not be right for you.
- Less stability. A shorter loan term comes with less stability than a long-term mortgage. If the market is changing, you’ll be more susceptible to interest rate fluctuations at renewal, which may lead to higher monthly payments.
5-Year Term Drawbacks
- Less flexibility. If interest rates dip throughout your loan term, you won’t be able to take advantage of them unless you break your mortgage early, which comes with added costs.
- Higher prepayment penalty fees. If you choose to break your mortgage before the term ends, the penalty fees are much higher on a long-term mortgage than they are on shorter terms.
How Can You Find A Good Rate On A Short-Term Mortgage In 2024?
To find the lowest rate on a short-term mortgage, you’ll need to shop around with different lenders to see who offers the best deal. However, doing this on your own and calling up individual lenders can be time-consuming.
To save you time and hassle, your best bet is to work with a mortgage broker, like Mortgage Maestro. And there are plenty of reasons why you’ll want a broker to take the reins when it comes to finding you the best rate on a mortgage:
- Find the lowest rates and best terms. Since brokers are connected to a vast network of lenders, they’ll be able to connect you with lenders who offer the best rates and terms based on your financial and credit profile. This can save you a ton of money in interest payments over the life of your loan.
- Save your legwork. Mortgage brokers are regularly in contact with a wide variety of lenders, many of which you might not even be aware of. They can direct you to the right lenders while steering you away from others who may charge more than necessary.
- Custom Solutions. Rather than fill out and submit dozens of mortgage applications for each lender, you can apply once online and get a free, no-obligation quote on a mortgage.
- Mortgage guidance. From the time you start looking into mortgage products through to final mortgage approval, your broker will guide you.
Should You Choose A Short Or Long Term?
The choice between a short or long-term mortgage will ultimately come down to your particular situation and the market, both current and future. To help you decide between the two options, consider the following.
When To Choose A Short-Term Mortgage
A short-term mortgage might be better for you if …
Interest rates are expected to dip. If you have reason to believe that mortgage rates will decrease over the next little while, then you may want the flexibility of renewing your mortgage sooner. That way, you can snag a lower rate sooner and take advantage of major savings.
You plan to sell within a couple of years. If you have intentions of selling your home within a few years, then it might make sense to go with a shorter-term mortgage. If you sell your home before the term is up, you’ll face early prepayment penalties. But if you manage to time the sale of your home with the end of your loan term, you can avoid these unnecessary costs.
When To Choose A Long-Term Mortgage
A long-term mortgage might be better for you if …
Interest rates are expected to increase. Long-term mortgages may be ideal if you can secure a decent rate today and expect interest rates to increase shortly. By locking in at today’s rate, you can hedge against any rate fluctuations and protect your mortgage payments from increasing.
You plan to stay put in your home for the long haul. If you don’t intend to sell your home any time soon, then a long-term mortgage might be a good option. In this case, you won’t have to worry about breaking your mortgage and paying early repayment penalty fees while taking advantage of the security of a longer-term mortgage.
Final Thoughts
Whether you’re a new homebuyer or a current mortgage holder, you’ll most likely be faced with much higher mortgage interest rates today compared to just a couple of years ago. While there’s little you can do about the current posted rate, you can make decisions to help keep your mortgage payments within an affordable range. Consult with a seasoned mortgage specialist to help you find the best lender and mortgage product for you.
