Are you planning to buy a property and confused between a 5-year loan tenure and a 10-year loan tenure? Well, mortgages are indeed confusing, especially for the first-time buyer. We will help you choose a better loan tenure to save your money.
Is buying a house your ultimate dream? As per a recent estimate conducted by the Mortgage Professionals in Canada, the expected average outstanding mortgage residential credit is $2 trillion (about $6,200 per person in the US). It shows how big the mortgage industry in Canada is.
The most popular tenures for securing a mortgage loan are 5- year and 10-year. Most often confuse new home buyers with which term they should go for.
What Is a Variable Rate and Fixed-Rate Mortgage?
Before embarking on our journey to make you understand the different propositions of the 10-year and 5-year long mortgages, first understand the variable and fixed-rate mortgages.
Variable Rate Mortgage
As the name suggests, a variable rate is never constant. It keeps on changing and fluctuating by the prime lending rate of the lender from which you have secured a loan.
However, this effect of an increase or decrease in your mortgage rate is borne by your principal amount, with your monthly mortgage payments remaining constant.
A variable mortgage rate certainly offers more flexibility as a homebuyer can enjoy the dips in the mortgage rates.
Most lenders, such as banks and financial institutions, give an option to the homebuyer to convert their fixed-rate mortgages of a specific tenure to a floating rate with no prepayment charges.
Under this option, the mortgage rate remains fixed and constant throughout the loan tenure. Most conservative borrowers prefer to take a fixed-rate mortgage as by doing this they precisely know when the mortgage loan will cease to exist.
The mortgage rate you have subscribed to the mortgage loan will remain the same, irrespective of the market conditions and current trends.
What Is A 5-Year Loan Mortgage?
Most new home buyers confuse the numerical “5” in the 5-year mortgage loan with the repayment period, which is incorrect.
Practically, no lenders offer a mortgage loan for such a shorter duration. With the “5” they refer to the fact that you can fix your mortgage loan rate for 5-year. After which, the mortgage rate will be flexible for the balance tenure.
However, by paying an additional amount every month that is over and above your regular monthly mortgage payments, you can certainly pay off your mortgage loan in 5 years or even less than that.
What Is A 10-Year Loan Mortgage?
Typically, mortgage loans are of a longer duration, that range from 15 years to 30 years. However, a 10-year loan mortgage is the newest kid on the block, wherein you agree to pay back your mortgage loan in 10 years.
A 10-year mortgage comes in two different variants, which are:
- 10-year fixed mortgage loan: The mortgage rate will remain the same throughout ten years.
- 10-year variable mortgage loan: The mortgage rate will vary and fluctuate on the prime rate of the lending bank and the market conditions.
Being a specific product, it draws several advantages as well over the traditional long tenure mortgage loans, which are:
- Lower Mortgage Interest Rate: compared to a traditional mortgage loan spanning over 15 years to 20 years to even the standard 30 years, a 10-year mortgage loan charges a lower interest rate.
A higher portion of your monthly mortgage payments reduces the principal amount, rather than the interest.
- Gains You Peace of Mind: Undoubtedly, mortgage loans are stressful. Who likes to pay a portion of their hard-earned money towards regular mortgage payments and for longer periods? Well, nobody.
Most borrowers experience satisfaction and happiness after they pay off a mortgage loan. Hence, when your liabilities end after just 10 years, it helps you gain peace of mind.
- Develop an Early Home Equity: It is common for the real estate market to appreciate with time. It creates the concept of home equity, which refers to the difference between:
- The market price of the property
- The outstanding debt balance on the property
By opting for a 10-year mortgage loan, you can certainly pay off your liabilities much more quickly, helping you to create home equity much sooner.
How Can You Decide Between the 5-Year Loan Mortgage and 10-Year Loan Mortgage?
It all depends upon your source of revenue/ income, your risk appetite, and your choice. If you feel you can beat your regular monthly mortgage payments and want to repay the mortgage loan fast, opt for a 5-year mortgage loan.
If you want stability, enjoy the benefits of a lower mortgage rate, and prefer to build home equity quickly, consider going for a 10-year mortgage.