Choosing your mortgage term: exploring the pros and cons of 30-Year vs. 25-Year options
Choosing your mortgage term: exploring the pros and cons of 30-Year vs. 25-Year options
The decision between a 30-year mortgage, and a 25-year mortgage depends on various factors and individual financial circumstances. Each option comes with its own advantages and considerations.
Lower monthly payments: with a longer mortgage term, the monthly payments are spread over a more extended period. As a result, the monthly installment for a 30-year mortgage is generally lower than that of a 25-year mortgage. This can be beneficial for borrowers who want more manageable monthly payments or need to free up cash for other expenses.
Increased affordability: the lower monthly payments of a 30-year mortgage might enable borrowers to qualify for a larger loan amount or afford a more expensive property. This can be advantageous for those looking to buy a more significant or better-located home while keeping monthly payments within their budget.
Cash flow and flexibility: lower monthly payments can provide greater cash flow flexibility, allowing borrowers to allocate funds to other investments, savings, or discretionary spending. This can be especially helpful for individuals with fluctuating income or those looking to invest in other opportunities with potentially higher returns.
Prepayment options: many Canadian mortgages offer prepayment options, allowing borrowers to make extra payments towards the principal. With a 30-year mortgage, the minimum required payments are lower, giving borrowers more flexibility to make additional payments when they have surplus funds, thereby potentially reducing the overall interest paid over the life of the loan.
Higher total interest paid: although the monthly payments are lower, the longer loan term results in more interest paid over the life of the mortgage. This means the total cost of the loan is higher with a 30-year mortgage compared to a 25-year mortgage.
Equity build-up: with a 30-year mortgage, the rate at which you build equity in your home is slower compared to a 25-year mortgage. This means it may take longer to reach a point where you have significant equity in the property.
Ultimately, the choice between a 30-year and a 25-year mortgage should be based on your financial goals, cash flow situation, and long-term plans. It is crucial to carefully evaluate your financial capacity, future income expectations, and personal preferences before making a decision.
If your ultimate goal is to pay off you mortgage as quickly as possible, chose the 25-year option, and then take advantage of the various pre-payment options offered by many lenders i.e. double monthly payments or permission to pay up to 10-15% of the value of the mortgage without penalty; these prepayments go directly towards the principal.
It you would like us to run the numbers for you, please contact us at Fred and Martin Mortgages, and we will happy to so. Best of all, it’s free and could save you thousands.
Fred and Martin