5-Year Fixed Mortgage Rates
5-year fixed mortgages are slowly becoming the most popular mortgage term in Canada for three obvious reasons.
- These mortgages are the lowest cost option available for those who want to lock in their payment and interest rates for a long term.
- You can opt for a fixed-rate mortgage if you have no intention of refinancing or increasing the payment before 5 years.
- With 5-year fixed-rate mortgage, you can qualify for a mortgage at the rate you can pay, which is known as the contract rate. Remember that most lenders require 1 to 4-year terms to prove that buyers can afford payments at the 5-year fixed rate.
5-year Fixed Mortgage Basics
5-year mortgage rate represents your mortgage term and it should not be confused with amortization period. Your mortgage term is the time period for which your current mortgage rate will be locked. An amortization period, on the other hand, is the amount of time you can take to repay your mortgage.
Your mortgage term is the point at which you can renew your mortgage rate. Typically mortgages have a 5-year term and a 25 year amortization period.
When a mortgage rate is fixed, it means that a certain percentage rate decided for the duration of the term. A variable mortgage rate means that your mortgage rate fluctuates with the changes in the interest rates of the market.
For example, if your 5-year fixed mortgage rate is 2.35%, you are required to pay an interest of 2.35% over the entire term.
Comparing 5-year Fixed Mortgage Rates – The Good and the Bad
Perhaps the biggest advantage of 5-year fixed-rate mortgages is that you know how much your mortgage payments will be and you don’t have to worry about changes in interest rates. You can plan your budget, set mortgage payments aside and forget about it. This, however, is not the case with variable rate mortgage.
When interest rates are low, it is recommended to lock in 5-year fixed mortgage rates. The five-year term offers stability as the chances of interest rates decreasing further are fairly low. An important thing to remember is that there is a chance you will pay higher interest rates on fixed mortgages if variable rates are low.
Are There Any Disadvantages?
Five-year mortgages do have a downside:
- Perhaps the biggest disadvantage is that fixed-rate mortgages have much higher penalties for early termination. Penalties by major banks can be harsh, as they are calculated using the bank’s current rate and not the actual interest rate.
- Fixed-rate mortgages over a long-term cost borrowers more interest than short-term and variable mortgages.
Is There Anything More I Need to Know about Fixed-rate Mortgages?
- Almost half of all mortgages in Canada have a 5-year fixed term
- Almost 3 out of 4 mortgage shoppers choose 5-year fixed mortgage rates if the spread between a variable and fixed rate is less than 0.5%.
- When you switch to 5 years fixed mortgage, most lenders will be willing to pay your appraisal and legal fee.