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A 6-month fixed-rate mortgage is excellent for someone looking at a quick turnaround with the property, like a real estate investor or expecting to pay off the mortgage within the next six months.
This guide will help you decide if a 6-month fixed-rate mortgage is the right option for you at this time. This guide covers the following;
A 6-month fixed-rate mortgage allows you to lock into a fixed-rate contract with a specific lender for six months. Your mortgage rate and regular mortgage payment will not change, even if the market rate changes in those six months.
A 6-month mortgage term gives you the unique opportunity to enjoy peace of mind without worrying about short-paying your mortgage principal due to a change to the market rate. The payment is stable for the entire term of your contract.
A 6-month mortgage keeps you in a relationship with a specific lender for six months. 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 six months, your relationship with the lender can be open or closed, commonly referred to as an open-term or closed-term mortgage. 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 6-month term without incurring a prepayment penalty. An open-term mortgage allows you to fully pay off, negotiate, or refinance your mortgage at any time without incurring 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 6-month term agreement.
This is not to be confused with amortization, which is how long you are expected to pay off the entire loan ultimately. The most common amortization periods in Canada are 25 years and 30 years.
Let’s say your mortgage has a 6-month fixed-rate term, amortized over 25 years, with a monthly payment of $approximately $1,500.
In Canada, a mortgage term can range from six months to 10 years. A 6-month fixed-rate mortgage implies that your mortgage contract with the lender will expire (or mature) six months from the mortgage registration date.
Because your mortgage rate is fixed for the entire 6-month 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 six months of the mortgage term.
At the end of the 6-month 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 six months to three years, six months or even one year.
There are many reasons why you may choose to refinance your mortgage after the end of the 6-month 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, starting as a new term.
You can choose to renew the mortgage by moving your mortgage to a new term of, say, 2-years, 3-years, or 5-year term. The mortgage rate type for these terms can either be fixed-rate or variable-rate.
Your amortization period and the loan balance will not change from your current balances when you renew the mortgage.
Federally regulated lenders, such as Bridgewater, Equitable Bank, Home Trust, MCAP, and Royal Bank (RBC), 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 6-month fixed-rate mortgage will be right for you if you:
On the flip side, a 6-month fixed-rate mortgage would not be suitable for you if:
A 6-month fixed-rate mortgage will be right for you if:
A 6-months Variable-Rate mortgage is better if you: