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Some of the terms or words used when discussing mortgages can be confusing. Let us help clear up some of this confusion for you.
Mortgage rates tend to fluctuate up and down a little bit. As the ‘prime rate’ fluctuates, the interest you pay would change as well, therefore changing your monthly payments. However, if you opt for a “fixed” mortgage, the interest rate you sign up with stays the same until you renew at the end of your term. For example, if the rate is 3.99% when you sign up for your mortgage, that is what your rate stays at.
That’s not the whole picture because a mortgage is taken out over a long period; twenty or twenty-five years are common lengths of time. This is called the amortization of the mortgage. But a bank will not guarantee a rate for twenty-five years, so you sign up for a two to five-year term on the mortgage.
In a 5-year fixed-rate mortgage, you would renew at the then-current interest rate every five years for the length of your amortization (e.g. 20 or 25 years).
It is easy to see the benefit of a fixed mortgage when you consider how rates can fluctuate. When you sign the documents, you have the peace of mind knowing that your interest rate will stay the same.
Rates are at an all-time low right now and the chance of them going lower by any significant amount is unlikely. So, even though 5-year terms are not the only mortgage terms available, they are generally a better option for the stability. Going with a shorter term won’t save you much in interest and there likely won’t be a better rate to jump on, so the 5-year term offers a longer stretch of being “locked in” to a good rate.
Looking back on past fluctuations, 5 years variable mortgage rate interest is usually cheaper over time. But this isn’t always the case, and it is always in your best interest to look at all the fact and compare everything about a potential mortgage. Our tools at CompareMyRates.ca can help make this process simple and headache free.
Key points regarding a 5-year fixed mortgage:
The amount of monthly income you have is not always something you can directly control. For that reason alone, a 5-year fixed mortgage may be the only one you can qualify for. To get a lower rate on variable or one to four-year fixed rate, most lenders will require proof that you can afford the posted 5-year fixed rate (which can be higher than the actual 5-year rate you would pay).
If you have no plans to change your mortgage for five years and you want to lock in your rate and your monthly payment, then a 5-year term will be the most cost-effective approach.
These are just a few reasons that make a 5-year fixed mortgage one of the most popular ones that Canadians choose today. But like anything related to finances, you need to weigh the pros and cons. A 5-year fixed mortgage is not without its pitfalls.
If you are thinking that you may want to upgrade your home or sell it and change lenders before your term is up, you may get stuck with a much higher penalty than other mortgages. This can cut into the equity you thought you had in the home, especially when most fees will be calculated with posted rates instead of actual rates.
Rates have been coming down steadily for many years, but “locking in” your mortgage rate and payment doesn’t necessarily come free, or even cheap. Traditionally, those who are in fixed rates, trade the potential instability of a variable rate for a higher rate, so you will pay more interest in the long run. The upside is that you will always know how much you’re paying because it won’t change for years at a time.