The 1-year Fixed Mortgage
The 1-year fixed has one of the shortest commitments of any mortgage term.
People choose 1-year mortgages for four primary reasons:
- Because the rate is lower than other terms.
- Because they don’t expect to have a mortgage much longer than 12 months.
- For more refinance flexibility (because you can renegotiate the mortgage sooner without penalty).
- Because they think variable-rate discounts will improve within 12 months.
At times, 1-year rates are the lowest in the market, even lower than floating rates. That makes them a good alternative to a variable, especially when variable-rate discounts are smaller than normal and expected to improve.
One-year mortgages have some disadvantages too:
- Renewing in one year means you may have to pay switching costs more frequently if you change lenders.
- If rates jump, you’re not protected at renewal like you would be with a longer fixed term.
Here are a few more tidbits about this particular term:
- Only about 1 in 16 borrowers choose 1-year mortgages.
- In terms of interest cost, studies have shown that 1-year terms perform very similarly to variable-rate mortgages.
- Some lenders are notorious for quoting poor rates to people who try to renew their 1-year terms.
- To get a 1-year term, most—but not all—lenders make you prove you can afford a payment based on a higher posted 5-year fixed rate (a.k.a. “qualifying rate”). All borrowers who have less than 20% equity must qualify based on the higher “benchmark five-year rate,” as set by the Bank of Canada.
- You can lock in your renewal rate in just six to nine months (since most lenders offer 90- to 180-day rate holds).
- Many lenders do not pay legal and appraisal fees when you switch into a 1-year mortgage
(By contrast, lenders often pay legal and appraisal costs on terms of three or more years.)
- The most flexible 1-year terms let you convert into a longer term at any time with no penalty.
If you want to guesstimate where 1-year rates are headed short term, keep an eye on Canada’s 1-year treasury bill yield (below).