How to choose your mortgage

How to choose your mortgage

When it comes time to choose a mortgage, the most important part is obviously finding the right mortgage solution. There are many types of mortgages; the short-term and the long-term of course, but also the very long-term. Each one of those have their pros and cons, so it is better to choose the most appropriate for that moment in your life.

The importance of risk tolerance

There is a simple rule about mortgage interest rates (with its exceptions, or course): the longer the mortgage term, the higher the rate. Based on this, you could logically understand that the short term has a much more interesting rate. Never forget, though, that as it is a capital market, you should base your decision on risk tolerance, as these rates fluctuate.

If you have a higher risk tolerance, these rate fluctuations don’t really matter, so a short-term mortgage would be adequate to get this mortgage done with faster. But say you have a low risk tolerance and you are planning on staying in that new property for over 10 years, a slightly higher rate on a long-term mortgage would be recommended, as you would be protected from a sudden rate hike.

Adapt your rate to your goals

For example, you want to buy a second house you wish to renovate and resell in about a year. One would guess you want to make a nice profit out of this, so the short-term mortgage would be the better option in this case. You could take up a year-long term to not only have the best rates on the market, but also to avoid paying large penalties when you sell it.

On the other hand, if for some reason you can no longer afford to pay for your payments, you could consider switching to a very long-term (up to a few decades long). But never forget, even though each individual payment is much cheaper than before, that new house will also turn out to be way more expensive in the long run! This mortgage will also chain you to a financial institution for many years with practically no negotiating power.

So, you want to pay less interest?

The first thing that usually comes to mind is: The rate, the rate, and don’t forget the rate! And… it is actually one of the better ways to pay less interest. But THE best way to pay as little interest as possible when you take up a mortgage is to pay for it as fast as possible, by paying it on over 10 years, instead of 25, for example.

There are various ways to help you quickly pay it without hurting your budget too much. The accelerated weekly payment is a good example, but you can use a mortgage payment calculator to help you decide, based on your chosen term and amortization.

Remember

  • The mortgage term has a very big influence on the rate. Typically, the longer the term, the higher the interest rate.
  • Your mortgage term is usually based on your risk tolerance and your own personal goals.
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