Mortgage Basics

Is a Short-Term Fixed-Rate Mortgage Right for Me?

Is a Short-Term Fixed-Rate Mortgage Right for Me?
Written by
  • Ashley Howard
| 22 August 2023
Reviewed, 31 August 2023
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    In the current market with ever-increasing mortgage rates, many Canadian homeowners and first-time buyers are opting for short-term mortgages. In particular short-term fixed-rate mortgages of 2 or 3 years are emerging as one of the more popular choices over 5-year terms for those coming up for renewal. 

    There are countless options out there for financing your home, and with so many options available, it can be tricky to decide which one is best for you. This post will take an in-depth look at short-term fixed-rate mortgages and explore if they are right for you and how they could benefit you as a homeowner or potential homeowner.

    Key Takeaways

    • Short-term fixed-rate mortgages are gaining popularity amidst economic uncertainty, offering an appealing blend of stability and flexibility.
    • Despite the potential advantages of short-term mortgages, they come with some risks.
    • Individual financial circumstances, market trends, and future predictions need to be considered when determining whether a short-term fixed-rate mortgage is right for your mortgage needs.

    What Are Short-Term Fixed-Rate Mortgages? 

    As the name suggests, short-term fixed-rate mortgages are mortgages with a fixed interest rate for a shorter duration, typically 1-3 years. These mortgages provide borrowers with the security of a fixed interest rate while allowing them to potentially benefit from lower rates in the near future when they come up for renewal

    Pros and Cons of Short-Term Fixed-Rate Mortgages

    Shorter-term fixed mortgages, like any mortgage term, have their set of advantages and disadvantages. The term you choose should be based on what you expect the economy to do in the short and long term. The below table outlines some of the pros and cons of choosing a short-term fixed-rate mortgage. 

    Pros Cons
    Potential for lower rates – If interest rates decline, you could renew at a lower rate. Potential for higher rates – If interest rates increase, you could end up renewing at a much higher rate. 
    Financial flexibility – Shorter terms allow you to reassess your finances more frequently. If you should need to break your mortgage, the penalty will be lower compared to longer terms.  Frequent renewal – Compared to longer-term fixed-rate mortgages, a shorter term requires you to renew more frequently, exposing you to more market volatility and rate fluctuations. 
    More rate certainty – Compared to variable-rate mortgages, fixed rates offer more predictability since the interest rate remains constant during the term.  Cannot benefit immediately from lower rates – Compared to variable rates, fixed mortgages are locked in for the term. If interest rates fall, you are unable to benefit from those savings. 

    Factors to Consider When Deciding on a Mortgage Term

    Choosing the right mortgage term depends on your financial stability, risk tolerance, and future economic and rate predictions. Carefully consider your financial goals, the current economic climate and where it may be headed. It’s always recommended to seek advice from a professionally licensed mortgage expert before making a decision.

    If the economy and inflation are increasing rates like in our current environment, the uncertainty around the economy is likely to put pressure on homeowners and homebuyers who are grappling with much higher mortgage carrying costs. This is especially true if you took on a mortgage when interest rates were at all-time lows. 

    In these situations, a short-term fixed-rate gives you stability over the short term (even if rates are much higher than your current rate). At the same time, you delay locking in a rate for a longer duration in the hopes that interest rates will soon decline, allowing you to benefit from a lower rate when you come up for renewal.

    Short-Term Fixed-Rate Mortgage vs. Long-Term Fixed-Rate Mortgage

    Long-term mortgage rates provide stability with a fixed interest rate for a longer period, typically 5 years. They are traditionally the preferred choice for borrowers seeking financial predictability and stability. However, they may not offer the same potential for savings if interest rates fall within the term and you are locked in. 

    Longer terms provide peace of mind since you know exactly how much you will pay for your mortgage each month for 5 years. You also avoid the need to renegotiate rates as often when compared to shorter terms. However, breaking a fixed-rate mortgage with a longer term can be much more costly if you are in the middle of your term. 

    Short-term mortgage rates provide stability with a fixed interest rate for a shorter period, typically 1-3 years. These types of terms are increasing in popularity as interest rates remain stubbornly high. There is greater potential for savings with a shorter term but also more risk if rates increase further as you are more exposed to changes in the market when renewing more frequently. 

    Shorter terms provide the benefit of peace of mind since you know exactly how much you will pay for your mortgage each month for the duration of your term. However, shorter terms also provide the advantage of being less costly to break should you need to in the middle of your term when compared to 5-year or longer terms. 

    How to Qualify for a Short-Term Fixed-Rate Mortgage?

    Qualifying for a short-term fixed-rate mortgage is similar to qualifying for any other mortgage term. Lenders will consider your credit score, income, employment stability, down payment, and debt service ratios

    Doesn’t Seem Like a Fit For You? Alternatives to Short-Term Fixed-Rate Mortgages

    If a short-term fixed-rate mortgage doesn’t seem the best fit for your needs, consider alternatives like long-term fixed rates or variable-rate mortgages. 

    A long-term fixed-rate mortgage would provide the same stability and predictability in mortgage payments though for a longer duration. This could be the better alternative if you don’t see yourself moving in the next 5 years and prefer to take less risk and stay locked into your rate for longer. 

    Although there is the potential that you will lose out on savings if rates decrease over the term of your mortgage for some, the longer-term stability makes this option more suitable. There is also no guarantee that rates will decrease over the term, and they could instead increase, so a longer term would shield you from raising rates until your renewal.  

    A short or long-term variable rate could also be a good option as it provides either a static (variable-rate mortgage) or fluctuating (adjustable-rate mortgage) payment with a fluctuating cost of borrowing. 

    Although variable mortgage rates could be more risky as they are unpredictable and exposed to market fluctuations, there are benefits, like realizing immediate savings if interest rates fall during the term. However, the cost to break a variable-rate mortgage is much lower when compared to fixed-rate mortgages, as the penalty calculation is usually based on 3 months of interest. You also have the benefit of being able to lock into a fixed rate at any time should interest rates start to increase.

    Frequently Asked Questions

    What is the difference between a short-term fixed-rate mortgage and a variable-rate mortgage?

    A short-term fixed-rate mortgage maintains the same interest rate for the entire term, while a variable-rate mortgage can fluctuate based on changes to interest rates.

    Are short-term fixed-rate mortgages more expensive than long-term fixed-rate mortgages?

    Not necessarily. While shorter terms may have slightly higher interest rates, they may also be less expensive if interest rates fall during your term, as you will benefit from renewing with a lower rate at maturity.

    Can I switch from a short-term fixed-rate mortgage to a long-term fixed-rate mortgage?

    Yes, you can switch or renew to a different mortgage term when your current term ends without penalty. If you wish to renew before the end of your current term, associated penalties could negate any cost savings if you plan to switch for a lower rate. 

    Conversely, your lender may provide an option for early renewal with a blend and extend, letting you blend your remaining term and rate with another longer term and rate to get a weighted average rate on a new longer term.

    Final Thoughts

    Choosing the right mortgage is a decision that depends on your unique financial circumstances and short and long-term goals. A short-term fixed-rate mortgage can be an excellent choice for some, offering the potential for savings and financial flexibility. However, you must consider the pros and cons and weigh them against the other options available to ensure you choose the mortgage solution that best meets your needs. Ready to get started? See how you can compare and save on your mortgage and get a quote today.