Once you’ve decided that you want a fixed rate over a variable rate mortgage, you then have to determine if you want 15 or 30 years. Taking on a loan for 15 years may seem impossible to some people, while others may think that’s just the right amount of time needed to pay it off. Generally, Canadians opt for anywhere from 25 to 30 years for their mortgages, but that doesn’t mean you have to too.
Fixed rate mortgages: 15 years With 15-year fixed rate mortgages, you have the advantage of paying off the loan faster. Once you’ve paid off your mortgage, you can focus on putting money aside for other things like your retirement, children or grandchildren’s educations, vacations, etc. You’ll also save money on interest since you’ll pay more interest over 30 years than you will over 15. For example, 4% interest on a $200,000 home is $66,288 over the course of 15 years. The same amount of interest on the same property for 30 years is $143,739. Finally, with a 15-year loan you can build up the equity in your home quicker because you’re taking less time to pay off your loan.
Fixed rate mortgages: 30 years For fixed rate mortgages at 30 years, you’re looking at increased time to pay back your loan. You’re also looking at a lower monthly payment but, as aforementioned, more interest to pay over the 30 years. However, when you have lower monthly mortgage payments to make, you can save more money to put towards retirement, credit card payments, etc. With a 30-year mortgage you get to keep more cash in your pockets, but you will be putting less towards your mortgage. You can also make extra mortgage payments over the course of the 30 years to reduce the balance, but watch out for prepayment penalties.
Are the monthly payment amounts really that different? With fixed rate mortgages at 15 years, you’d think that the monthly payments would be double those of 30 years. This isn’t usually the case. Let’s use the same example as before with the $200,000 mortgage at 4% interest. The 30-year monthly payments would be about $950. The same mortgage with the same interest at 15 years would see a monthly payment of about $1,450. That’s less than double with a difference in monthly payments of approximately $500.
Which one is right for you? When it comes to choosing a 15- or 30-year fixed rate mortgage, you must evaluate your financial situation. Sit down with your mortgage broker and lay everything on the table. Your broker can help you make the decision as to which one is right for you by reviewing your financial situation and explaining in detail what your monthly payments will be, the interest and how you can manage a 15-year vs. a 30-year loan.
