The 4-year Fixed Mortgage
The 4-year fixed is an afterthought to most mortgage shoppers, but they can occasionally be the best value in the market.
People choose 4-year terms for two primary reasons:
- When they’re meaningfully cheaper than a 5-year fixed, but not much more than a 3-year fixed.
- Because they don’t expect to have a mortgage much longer than four years (the average Canadian breaks or renegotiates their mortgage in 3.5 years).
Four-year mortgages have a few disadvantages, however:
- If rates jump significantly, the rate you renew into (after four years) could cost you more than the upfront savings of choosing a 4-year instead of a 5-year.
- Fixed rates can have higher penalties (versus a variable rate) for early termination.
Here are a few more tidbits about this particular term:
- Only about 1 in 16 borrowers select 4-year mortgages (source: CAAMP).
- To get a 4-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 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 4-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.)
- People who buy homes for their kids in university sometimes choose 4-year terms because they correspond to the time it takes to get a 4-year degree.
If you want to guesstimate where 4-year rates are headed short term, keep an eye on Canada’s 4-year government bond yield. Here’s a chart link.