Mortgage Term Matters
June 4, 2019 | Posted by: Haystax Mortgage
Recently the Governor of the Bank of Canada, Stephen Poloz, put out a statement indicating that he thought mortgage lenders need to offer a broader range of products. There was a particular focus on having extended terms beyond the most popular 5-year products. Mr. Poloz, correctly, feels that offering a longer-term mortgage product would shield consumers against rate instability in the future.
Since that announcement there has been some great fanfare from a few lenders touting “new” longer terms products such as 7, 10, 15 and even 20-year terms on a mortgage. The thing is, these products have always been available but they are not nearly as popular as the more traditional 5-year term.
I recently read a bunch of articles from various mortgage professionals across Canada addressing longer terms for mortgages. While there seemed to be a consensus that there is a place for these longer-term products, there was most definitely a slant to the commentary that seemed designed to scare people away from these alternative terms. I think it is time to ‘debunk’ some of the mis-information being tabled.
1) Longer term means less flexibility. Well… not true. Like any other mortgage product, it really depends on the terms and conditions for the mortgage. Like a 5-year mortgage, many longer-term products can be ported to a new property, you can refinance them, and you do have pre-payment options. For people who want rate stability but still have some flexibility, longer term does not mean you lose that.
2) Harder to qualify for. This is, to put it simply, not true at all. In Canada we have a benchmark lending rate set by the Bank of Canada which was established in 2017. The current benchmark, or qualifying rate, is 5.34% a full 2.00% higher than the lowest available 10-year rate as of the time I am writing this. The fact is that even people who are applying for a 5 year mortgage need to qualify at the benchmark rate.
3) Bigger Penalty. Sorta... This is a bit of a longer one to de-bunk. I read one article where they kept talking about a 90-day penalty or Interest Rate Differential. The fact is that 90 days is just a different way of saying 3 months interest penalty – which is standard on any closed term mortgage. Interest Rate Differential (commonly referred to as IRD)… yes this can be a massive penalty, BUT… IRD also applies on most 5 year mortgages as well. So, to say that this is somehow unique to longer term mortgages, it just is not true.
Of the many comments one I found most disturbing is “You have to know that in the first five years you will absolutely, positively not need to break the mortgage because the penalty will eviscerate you. That’s number one—the penalty will destroy you.” This type of commentary from mortgage brokers is shockingly common, and while penalties can hurt… this is just fear mongering at its worst.
The fact is that none of us know our future, and while bad things can happen, we can’t make all of our decisions based on terrible possibilities. If we did that, we would never drive, fly, or do anything that has risk. Could something bad happen in the first 5 years? Maybe. Maybe not. Here is a bad thing that they seem to ignore… what if inflation starts to skyrocket and rates follow suit? What if when you got your 5-year mortgage your rate was 3.00% and when it came time to renew rates were at 6%? That would nearly double your monthly payment and for over 70% of mortgage holders, it would financially cripple them.
The truth, the real reason, why mortgage brokers do not want you in a longer-term mortgage? Money. You see if you do a mortgage with a 5-year term that means that they are going to make more money on commission because you will need to renew in 5 years. It also means that they can “remarket” to you more frequently to get you to refinance without you facing large penalties so that they can make more… you guessed it… money.
A broker “churns” their book of business on average every 28 months and they do it so that they can make more commission from the lender. The problem is that the client pays a penalty, and normally the amortization is stretched out to 25 years again. That means longer to pay off your mortgage, and paying more in interest.
A longer-term mortgage is something that is very worth considering when you are looking at your next mortgage. It can protect you against rate increases, and give you genuine peace of mind. If your mortgage professional really listens, and helps you build a proper plan, you can actually reap significant benefit from a longer term. With rates at the lowest they have ever been in history, now is actually the best time to secure a 10-year (or longer) term.
At Haystax we are brokers; but our priority is not commission - it is you. We care far more about making sure that you have a strong, well structured, mortgage plan in place. You not only need to have clear options; you deserve to have them – we believe it is your right.
We are here to make money, just like any other business. While that is true, we will also never sacrifice our clients in the name of money, nor are we prepared to take any ethical shortcuts. We do what is best for you, always.
If you want to find out if a longer-term mortgage is the right fit for you – we would be pleased to answer any questions that you might have. There is no cost or obligation, we just want to make sure that you are getting the right information so that you can make an informed decision.
If you want to jump right in and apply for a mortgage, visit us at www.haystax.ca, have a quick chat with our virtual mortgage assistant and he will let you know in a matter of minutes up to 3 different lenders that you qualify with.