The 5-year Fixed Mortgage
The 5-year fixed is Canada’s most popular mortgage term, by far.
People choose 5-year terms for three primary reasons:
- They are the lowest cost mortgage available for those who want to lock in their payment and interest cost for the long term.
- Because they have no plans to increase or refinance their mortgage before five years is up.
- Because they cannot qualify for any other cheaper term. That’s because most lenders require variable and 1- to 4-year fixed borrowers to prove they can afford payments at the posted 5-year fixed rate, which can be up to two percentage points higher than one’s actual rate. With a 5-year fixed, however, people can qualify at the rate they pay (i.e., the “contract rate”).
Five-year mortgages have a few disadvantages, however:
- Fixed rates can have much higher penalties for early termination. Major bank penalties, in particular, can be relatively extreme as they are calculated using the bank’s posted rates instead of its actual rates.
- Long-term fixed rates have historically cost borrowers more interest than variable and short-term fixed rates (but rates have also been in a downtrend for over 30 years).
Here are a few more tidbits about this particular term:
- Depending on the year, about half of all mortgages have 5-year fixed terms.
- When the spread between fixed and variable rates is narrow (e.g., less than 1/2 percentage point), up to 3 out of 4 mortgage shoppers might choose 5-year fixed rates.
- Most lenders pay your legal and appraisal fees when you switch into a 5-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 be refinanced when changing lenders.)
- Five-year terms are the easiest mortgage for a lender to raise capital for. That’s because of all the capital available in the market for this specific mortgage (investors love 5-year terms). That keeps 5-year fixed rates exceptionally competitive, and often lower than even 4-year terms.
If you want to guesstimate where 5-year rates are headed short term, keep an eye on Canada’s 5-year government bond yield (below).