For most well-qualified borrowers with 20-29.99% equity, we’d venture to say there’s no better deal right now than the three-year. Not a 1-year fixed, not a 2-year fixed, not even a variable.
For conventional mortgages with 30%+ equity, only the lowest variable is cheaper at 2.70%. And floating rates offer no rate hike protection—if that’s important to you.
Swing for a Triple
All the best three-year terms now have a contract rate under 3%. On an effective rate basis (i.e., including cash rebates), three-year rates are as low as 2.82% in most large provinces, including Alberta, B.C., Ontario and most Atlantic provinces. That rate is good for refinances too.
Here’s what your chances look like if you opt for a “trey.”
- drop — (about a 1-in-3 chance this year according to implied odds in the bond market)
- you’ll get an edge with the lowest variable rates instead of a three-year
- rise — (despite the recently inverted yield curve, which portends an economic slowdown)
- a three-year protects you for three full years and lets you participate in potential future rate drops earlier than a 5-year fixed
- stay relatively flat — (which the market expects over the next 10 years, for what that’s worth)
- a three-year should save you more interest than virtually any other term.
Here’s another thing to remember. The average mortgage lasts roughly 3.8 years. A three-year is therefore well-suited to those who might move or refinance before five years. Reason being, it lowers the odds you’ll pay a penalty if you break your mortgage early.
Things to bear in mind:
- Some of the best three-year rates are lender promos. We don’t know how long they’ll last, especially since bond yields sprang to a 4-week high today.
- In many cases, 3-year fixed rates come with free legal fees on switches, and sometimes free appraisals too. That’s something you don’t get on most 1- and 2-year fixed rates.
- Rate premiums typically apply for amortizations over 25 years, non-owner-occupied rental properties, non-prime loans, etc.
- Penalties on 3-year fixed terms are sometimes a bit higher than variable rates if the interest rate differential kicks in. Albeit, the lowest variable rates in Canada currently have 3% of principal penalties, which is a lot more than the normal three-months’ interest charge. The moral: On any rates you see, read the rate notes carefully!
Statistically, only 7% of mortgagors pick 3-year fixed terms, according to Mortgage Professionals Canada. But when they’re priced this right, it’s worth being in that minority.