Never Choose A Mortgage Term Shorter Than 3 Years

2 days ago3 min read

But First What is a Mortgage Term in Canada?

When you apply for a mortgage in Canada, you must choose a "Mortgage Term".

But what is a mortgage term? A mortgage term is the length of time you’re locked into a specific interest rate and conditions. In other words, if you choose a 1-year term at a 10% rate, you’ll pay 10% interest for that year, and it won’t change. If you choose a 5-year term at 5%, you’ll have a 5% rate for 5 years, guaranteed.

In Canada, residential mortgage terms range from 6 months to 10 years. You can choose between a fixed rate, which stays the same, or a variable rate, which can change if the Bank of Canada adjusts its overnight lending rate (also called the prime rate).

Why You Should Never Choose A Term Shorter Than 3 Years

When purchasing a new home, never choose a term shorter than 3 years.

Here's why:

If you’re buying a new home and think a short term makes sense because you think you might move in a year or two, you’re setting yourself up for trouble.

I’ll borrow wisdom from the legendary investor Warren Buffett. He says when you buy real estate, a farm, or a business, you shouldn’t plan to hold it for less than five years. It’s a long-term investment.

Why Is Buffett's Advice Relevant to Your Mortgage Term Choice? Two reasons:

High Costs of Moving: Real estate transactions in Canada are expensive. Imagine your property goes up $50k in value over two years, but your realtor fees are $50k to sell. You’ve basically broken even - money you could’ve used elsewhere. In other words, there was no point in purchasing the home.
Homes Are Long-Term Plans: A home isn’t something you flip quickly. Maybe not 10 years, but at least 3. Moving too soon isn’t just a hassle—it’s expensive, between fees, movers, and so on.
Bonus Reason: Selling takes time. Say you pick a 2-year term and decide to sell right as it’s ending. Listing your home, finding a buyer, and closing the deal can take months. You might need to renew into another term, and short 6-month terms often come with high rates.

When a Shorter Mortgage Term Might Make Sense

Yes, my "never" rule doesn't apply in some scenarios. But they are rare.

First, if you're actively selling and up for a mortgage renewal, you won't renew for a 3-year term if you know your home will be selling in the next few months.

Second, you've already owned the home for at least three years and plan to sell soon. In that case, your long-term plan has likely run its course, and taking a shorter term will make sense. With that said, if you're moving to another home and need a new mortgage, most lenders today allow you to port your mortgage to the new home. If rates are high when you're moving and you have a super low rate, bringing that rate to your new home is a good idea.

If you’re unsure which term is best for you, feel free to email me at alex@triedandtruemortgages.ca. I’d be happy to chat about your options and plans. Sometimes, a fresh perspective helps.

TL;DR:

A mortgage term is how long your rate and conditions last; it can be fixed or variable, from 6 months to 10 years.
Stick to 3+ years to avoid high moving costs and short-term renewal risks; shorter terms only make sense if you’re actively selling.
Be sure to assess all of your options and if you have any questions, reach out ot your mortgage broker to see what makes sense for you.