The 2-year Fixed Mortgage
The 2-year fixed is often the term of choice for folks who don’t want to worry about rates every year, but want better-than-average upfront interest savings.
People choose 2-year terms for three primary reasons:
- Because the rate and payment is lower than most other terms.
- Because they don’t expect to have a mortgage much longer than two years.
- For more refinance flexibility (because you can renegotiate the mortgage sooner without penalty).
Sometimes 2-year mortgages have the lowest rates of any fixed term.
Two-year mortgages have a few disadvantages, however:
- Renewing in two years 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.
- In a declining interest rate environment, a fixed rate (even if only for two years) will usually cost you more than a variable rate.
Here are a few more tidbits about this particular term:
- About 1 in 14 borrowers select 2-year mortgages (source: CAAMP).
- You can lock in your renewal rate in just 18 to 21 months (since most lenders offer 90- to 180-day rate holds).
- To get a 2-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 5-year rate,” as set by the Bank of Canada.
- Many lenders do not pay legal and appraisal fees when you switch into a 2-year mortgage. (By contrast, lenders often pay legal and appraisal costs on terms of three or more years.)
If you want to guesstimate where 2-year rates are headed short term, keep an eye on Canada’s 2-year government bond yield (below).