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3-Year vs. 5-Year Fixed Mortgage: Which One Is Better?

3-Year vs. 5-Year Fixed Mortgage: Which One Is Better?

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When buying a house, one of the most important decisions is to pick the right mortgage loan. There are several mortgage options to choose from in Canada, and this can make picking one difficult for first-time homebuyers. If you feel confused between 3-year fixed and 5-year fixed mortgage rates, the information provided below might be of help.

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3-year fixed mortgage rate explained

What Is a 3-year fixed mortgage rate?

This defines the time during which the interest rate on your mortgage will remain fixed. Keep in mind that this is a completely different thing from amortization period of your mortgage. Amortization means the duration of the entire mortgage repayments, e.g., 25 years or 30 years.

When does a 3-year fixed mortgage rate make sense?

There are certain occasions when it makes more sense to go with 3-year fixed mortgage rate. Think of a period where the interest rates are falling. You speculate that the interest rates will fall only a little or remain at the current level for a time. In this case, lock yourself with a fixed interest for only three years. This way, you have the opportunity to take advantage of lower interest rates at the time you renew your mortgage. Short term fixed rates make sense for homeowners who are thinking of upgrading to a new home. With a short term fixed rate plan, you pay much less in penalties than with a 5-year fixed rate.

Comparing 3-year fixed mortgage rates with long term fixed rates

Before you decide your mortgage rate plan, it is best to compare it with long term options. If you believe premiums for a 5-year fixed rate are high, you might want to stay with a three-year plan. Historical data proves variable interest rates are more affordable. However, the certainty of your monthly payments with a fixed rate makes this rate more attractive for many home buyers.

Are 3-year mortgage rates popular?

Statistics show that only 20% Canadians are interested in keeping their mortgage rates fixed for two to four years. Short-term fixed rates are more popular in younger home buyers. Younger buyers seem not as concerned with making their interest rates fixed because they are less afraid of risk.

5-year fixed mortgage rate explained

What Is a 5-year fixed mortgage rate?

5-year fixed mortgage rate follows the same idea as a 3-year fixed rate. With this option, your interest rate on the mortgage remains fixed/constant for five years. After five years, the mortgage interest rates will change. Once again, the amortization period is the length of the mortgage program in its entirety.

People pick termed fixed rates to avoid fluctuations in interest rates. At the same time, they like the idea of treating their mortgage payment as a fixed expense every month. The payment can change every month with variable interest rate. When you choose the 5-year term with 3% fixed interest rate, payments will be the same, even if interest rates fluctuate from 3% to 4%. However, every home buyer has to meet certain requirements before they can take advantage of the 5-year fixed rates.

When does a 5-year fixed mortgage rate make sense?

Before you choose a 5-year fixed rate, compare it with the variable interest rates. Calculate the difference between the two rates and see how much you will save at the end of 5 years. Keep in mind that your short-term fixed rate will always be higher than variable rates. If the total difference calculated over five years is a significant saving, go for it.

Once again, the biggest advantage of fixed rate mortgage is that you are certain about your monthly mortgage payments. You don’t have to constantly worry about the fluctuating rates of interest in the market. You can take better financial decisions due to the certainty of your expenses.

A 5-year fixed rate also makes sense when the difference between this and a shorter termed fixed rate is small. Being locked into a fixed rate for five years is a better value than a 2 or 3-year fixed rate. We recommended you pick 5-year term when the interest rates are as low as you think they will go.

How popular are 5-year fixed mortgage rates?

They are quite popular in Canada, just as much as fixed rates, Both rest at 66% of all mortgages. The most basic term option available is one year and the maximum is 10 years. This puts a 5-year term right in the middle, giving it a risk-neutral place.

Terms with durations of more than five years comprise of only 8% of all mortgages. The popularity of shorter terms than five years is not much higher than 25% either. The only other favorite interest rate choice for Canadians is fixed rates with 66% popularity.

What affects the 5-year mortgage rates?

The pattern for 5-year Canada bond yields and 5-year fixed mortgage rates are pretty similar. This is because when bond yields are high, the mortgage rates will also be high. To meet the demand for bond yields, the lenders run short of finances for their mortgage program. This causes the mortgage rates to go high as well.