Lately there have been more than a few editorialists who have erroneously suggested that short term mortgages (six month) will save you money. These people obviously don’t know the Canadian first time buyer. Their opinion is based on posted interest rate alone, nothing else. The 6 month term mortgage rate is indeed less than the five year mortgage rate. These apparent experts have openly said that if you had chosen concurrent six month terms over the last 10 years that you would have been the winner. From strictly a rate point of view, they are probably correct, but from a Consumer point of view, they are wrong. When the normal Canadian applies for a mortgage, mortgage lenders are offering rate discounts to get the lion’s share of the business. Short term mortgage discounts and low payments do attract unsuspecting first-timers. When these Consumers receive a mortgage renewal from their lender, they simply look at the new rate of interest (non discounted) and what the new payment will be, sign the form and send it back, with the renewal fee. Rarely do normal Canadians call up their mortgage lender to negotiate rate or payment amount. The payment will surely increase, which is a surprise, and most likely not affordable, since six months after the purchase, first-timers are just beginning to realize the extra expenses of home ownership. The opportunity to prepay the mortgage or accelerate the payment won’t happen. From a lender point of view, it was quite inexpensive to trap (attract) the new homeowner. It only cost the lender a rate discount for 6 months. If one were to call to get a new discounted rate on the renewal, the maximum discount will not exceed .5%. You have now started from behind the 8 ball, and trying to get out from under won’t happen in the near future. Once you have started with a low payment, you most likely will have to keep taking short term mortgages to keep the payment as low as possible.

If the new homeowner had decided to take a five year term or longer, the same percentage discount would have been available (usually 1%). The original payment would have been slightly higher but it would have been guaranteed for five years. During the five year term, one may get used to the payment, even with the added expenses for home ownership. One may even be able to prepay the mortgage or accelerate the payment. Budget planning just became very much easier. By the time your first mortgage renewal occurs (in 5 years) most Canadians are earning more than they did five years ago. One may negotiate increased payments because they can afford it, and rate discounts of 1% are available for a new five year term.

If you are a seasoned mortgagor, you may want to gamble on concurrent short terms. For most people, I strongly recommend you look at long term stability with no surprises. Time will give you prepayment opportunities that won’t be available for the first time short term mortgagor.