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It can sometimes be confusing to decide between a 5-year term mortgage and a 4-year term mortgage because of the short time lapse between them. There is only a one-year difference between these two mortgage terms. But this difference can cost you or save you thousands of dollars in interest payments and probably pre-payment charges.
You will learn all you need to know to make the right mortgage term decision. We cover the rationale when selecting your mortgage term, why 4-year terms are better and not better for you, and what to do next when your mortgage term ends.
A 4-year fixed-rate mortgage allows you to lock in a fixed rate with a specific lender for four years. Even if the market rate changes, your mortgage rate and regular mortgage payment will not change for the entire agreement term.
A 4-year mortgage term gives you the unique opportunity to enjoy peace of mind without worrying about short-paying your mortgage principal because of a change to the market rate. The payment is stable for the entire term of your contract.
A 4-year term mortgage keeps you in a mortgage relationship with a specific lender for four years. You are bound by all the “terms and conditions” of the mortgage agreement and are obligated to make regular mortgage payments while in a relationship with the lender.
During these four years, your relationship with the lender can be open or closed, commonly referred to as open term or closed term mortgages.
The main difference between these terms is your ability to pay off the mortgage during your mortgage agreement with the lender.
A closed-term mortgage cannot be negotiated, refinanced or paid off in full before the end of the 4-year term without incurring a prepayment penalty. An open-term mortgage allows you to fully pay off, negotiate, or refinance your mortgage anytime without a prepayment penalty.
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Mortgage contracts are designed to last for a specific period. This is called a mortgage term.
The “term” is the length of time you contract to hold the loan with a specific lender.
You can either renew your mortgage contract with the same lender or take your mortgage to a new lender through a process called mortgage refinance after the 4-year term agreement.
This is not to be confused with amortization, which is how long you are expected to pay off the entire mortgage loan ultimately. The most common amortization periods in Canada are 25 years and 30 years.
Let’s say your mortgage has a 4-year fixed-rate term, amortized over 25 years, with a monthly payment of $2,000 to $3,000.
In Canada, a mortgage term can range from six months to 10 years. A 4-year fixed-rate mortgage implies that your mortgage contract with the lender will expire (or mature) after four years from the mortgage registration date.
Because your mortgage rate is fixed for the entire 4-year term, your monthly payment will not be affected by the rate changes in the market, and it will stay the same every pay period for the entire four years of the mortgage term.
At the end of the 4-year term, you can choose to either renew or refinance the mortgage.
Mortgage refinancing allows you to replace an existing mortgage with a new mortgage under different terms and conditions. Refinancing a mortgage will enable you to customize your mortgage more, such as switching the rate type from fixed to variable, switching the terms from four years to three years, four years or even one year.
There are many reasons why you may choose to refinance your mortgage after the end of the 4-year term:
Mortgage renewal is continuing your previous mortgage contract to a new term. Other features of your mortgage will remain the same as your interest rate, which will be reassessed to match the market rate, and the term, which will start as a new term.
When you renew the mortgage, your amortization period and the loan balance will not change from your current balances.
Federally regulated lenders, such as TD, First National, MCAP, and EQB, are required to provide you with a renewal letter at least two days before the end of your current mortgage term.
The renewal statement will contain the following information:
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A 4-year fixed-rate mortgage will be right for you if you:
On the flip side, a 4-year fixed-rate mortgage would not be suitable for you if:
A 4-year fixed-rate mortgage is better if:
A 5-year fixed-rate mortgage is better if: