The four-year fixed mortgage offers a better rate than five-year terms because it gives more flexibility to refinance earlier deprived of a penalty.
Clients choose four-year mortgages for two main reasons:
- They do not expect to pay a mortgage longer than 4 years (the usual Canadian renegotiates or ends their mortgage in 42 months).
- They are cheaper than a 5-year fixed mortgage, but not more than a 3-year.
Disadvantages of four-year mortgages:
- Fixed rates have a higher penalty as opposed to a variable rate for an early end.
- If rates jump considerably, the renewed rate after 4 years may cost you more than your savings when choosing a four-year instead of a five-year fixed mortgage.
There are a few more delicacies about four-year mortgages:
- The lenders usually make you prove you have enough money to get a four-year term grounded on the higher posted five-year qualifying rate. The Bank of Canada set that all mortgagors with less than 20% equity have to qualify on the higher “benchmark 5-year rate”.
- Only one in sixteen mortgagors chooses four-year mortgages.
- People choose a four-year term when buying homes for their children in the university since they match with the time to get a four-year degree.
- The moneylenders usually pay your appraisal and legal fees when you move into a four-year mortgage. (Reminder: Mortgage connected to a line of credit or a collateral charge mortgage must be refinanced when you switch lenders.)