The 3-year Fixed Mortgage
A 3-year fixed is a middle-of-the-road term.
People choose 3-year mortgages for four primary reasons:
- When their rates are significantly lower than 5-year terms.
- Because they’re a compromise between the rate protection of a long-term mortgage and the potential interest savings of a short-term mortgage.
- Because they don’t expect to have a mortgage much longer than three years.
- For more refinance flexibility (because you can renegotiate the mortgage sooner without penalty).
Three-year mortgages have a few disadvantages, however:
- If rates jump, you’re not protected at renewal like you would be with a longer fixed term.
- Fixed rates can have higher penalties (versus variable rates) for early termination.
Here are a few more tidbits about this particular term:
- About 1 in 14 borrowers select 3-year mortgages (source: CAAMP).
- To get a 3-year term, most—but not all—lenders make you prove you can afford a payment based on the higher posted 5-year fixed rate (a.k.a. “qualifying rate”). All borrowers who have less than 20% equity must qualify based on the much higher “benchmark 5-year rate,” as set by the Bank of Canada.
- Most lenders pay your legal and appraisal fees when you switch into a 3-year mortgage. (Note: You cannot typically “switch” a collateral charge mortgage or a mortgage linked to a line of credit. Those types of mortgages must generally be refinanced when changing lenders.)
If you want to guesstimate where 3-year rates are headed short term, keep an eye on Canada’s 3-year government bond yield (below).