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5-Year Fixed Rate Mortgage

A 5-year fixed rate mortgage is a popular choice for borrowers in home buyers because it offers predictability and stability. With a 5-year fixed-rate mortgage, you know exactly how much your monthly payments will be for the next 60 months. This can help you budget better and manage your finances more effectively.

In this article, we will provide an overview of how 5-year fixed rate mortgages work in Canada and also offer some tips on how to get the best interest rate.

5-Year Fixed Rate Mortgage - Comparewise

What is 5-Year Fixed Rate Mortgage about?

A 5-year fixed-rate mortgage is a type of mortgage with a constant interest rate for the entire mortgage period of five years. It is the most common in Canada among all other fixed-rate terms. There are open and closed 5-year fixed-rate mortgages.

When you have an open mortgage, you have the option of making extra payments to your mortgage, either in the form of monthly installments or a large sum, without incurring any further financial penalties.

 However, when you have a closed mortgage, you will incur such penalties. Mortgages with closed terms often have lower interest rates than open mortgages since closed mortgages provide fewer options for the borrower to customize their loan.

When taking out a fixed-rate mortgage, the interest rate will remain the same throughout the life of the loan. As a consequence of this, you could decide to adjust your budget appropriately until the time comes to renew your mortgage.

Top 5-Year Fixed Rate Mortgage Partners in CanadaGet a Rate
nestoClick here >>
Smarter LoansClick here >>
WiiBidClick here >>
National BankClick here >>
Coast CapitalClick here >>
EQ BankClick here >>
TangerineClick here >>
HomewiseClick here >>
MeridianClick here >>
MogoClick here >>

How does a 5-Year Fixed Rate Mortgage work?

A fixed-rate mortgage is a mortgage with a set interest rate and a term that remains unchanged. The interest rate is fixed and does not fluctuate throughout the loan. In Canada, most mortgages have a period of five years, and this ensures that the amount you pay will remain the same according to the agreement signed.

At the conclusion of each term, you must have paid off the mortgage in full, or you will have a balance to be paid. Because the majority of homebuyers need more time to repay their loan, they will either need to undergo mortgage renewal with the current lender or move to a new one.

Comparing 5-Year Fixed Rate Mortgage

In comparing fixed mortgage rates, you have to consider some factors, as well as the rate given by the lender. Various mortgage partners and brokers, such as Mogo, Tangerine, Nesto, Coast Capital, Homewise, and National Bank provide 5-year fixed-rate mortgages. The following are common types of mortgage products offered by these mortgage providers and brokers are;

Mortgage Pre Approval

A pre-approval for a mortgage enables you to set a mortgage rate for a specific period. This allows you plenty of time to search for your ideal property without being concerned about prices rising.

Mortgage Refinancing

Refinancing is the process that you go through when you wish to break the terms of your existing mortgage contract and negotiate the terms of a new one. You should not rush into the decision to refinance your mortgage because you run the risk of having to pay hefty penalty costs if you do so too early.

Enter your existing mortgage balance as well as the amount of equity you desire to access if you want to examine five-year mortgage rates on a mortgage refinancing. This will allow you to see how much you might potentially save throughout the loan.

Mortgage Renewal

If the term of your mortgage is about to expire and you still have a balance on your mortgage, you will be required to renew your contract for another period. You may accomplish this goal by working with either your current lender or a different one; nonetheless, it is recommended that you explore all of your available options.

Enter your current mortgage balance, the amount of remaining amortization, the frequency of your mortgage payments, and the location of your mortgage to examine mortgage renewal rates for a new five-year term.

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HELOC (Home Equity Line of Credit)

Home equity line of credit, which is mostly referred to as HELOC, is a type of loan that is taken against the equity that has been built up in a person’s house. The loan is used for several different things, and the interest rate is often lower than that of a standard personal loan.

To qualify for a home equity line of credit (HELOC), you need to have a decent credit score, hold at least 20% equity in your property, and have a high income to debt ratio.

Interest rate of  Home Equity Line of Credit (HELOC) is typically lower than those for conventional lines of credit. You pay interest on your borrowed money via a HELOC in addition to your regular mortgage payments.

Comparing 5-Year Fixed Rate Mortgage and 5-Year Variable Rate Mortgage

Although the prevalence of variable-rate mortgages has risen, a 5-year fixed-rate mortgage has historically been the primarily used form of mortgage in Canada. However, the popularity of variable-rate mortgages has expanded in recent years.

A good number of Canadian home buyers believe that locking in their interest rate for five years strikes an appropriate balance between the benefits of rate stability and the costs associated with doing so.

The price of government bonds with a term of five years has a significant influence on the interest rate charged on mortgages with fixed rates for that length of time.

Banks depend on bonds as a reliable source of income and a means of offsetting the risk of loss associated with the money they make available to borrowers in the form of mortgages.

When inflation rates in Canada are found to be greater than average, the Bank of Canada’s overnight rate is likely to be increased. This, in turn, might cause variable interest rates to become more expensive. Although, it does not affect fixed-rate mortgages because a fixed-rate mortgage is constant throughout the mortgage duration.

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Factors to consider when looking for the best 5-Year Fixed Rate Mortgage

When you are searching around for the best 5-year fixed mortgage for you, in addition to the actual mortgage rate, there are a few other things that you will want to take into consideration.

Pre-payment options

Check out the pre-payment choices your lender is prepared to make available to you and see what they are. You will be able to pay off your loan sooner and possibly save thousands of dollars in interest costs if your lender is willing to be flexible with pre-payment choices. Suppose your lender is willing to be flexible with pre-payment options.

Mortgage porting

 If you have to sell your house before the term of your mortgage is over, many lenders will let you do so. You may avoid defaulting on your loan by porting it, which entails taking your present mortgage and moving it to a different house with the same interest rates and conditions.

If you believe you may need to relocate before five years is finished, you should inquire with your lender about how portable it is. Some mortgages are not transferable, and many of those that are have restrictions that you should be aware of.

Contacting a Mortgage Broker to ask questions

Before signing a contract for a mortgage with a term of five years, you should carefully consider your current and future personal circumstances. When choosing the mortgage that’s best for you, you need to keep in mind that if you’re planning on going for any other kind of life change, that could have an impact on your capacity or willingness to stay in the property you’re buying.

You can contact a mortgage broker if you have questions about the best mortgage product and type to choose. Examples of Mortgage Brokers are Nesto, Homewise, Mogo and so on.

Benefits of a 5-Year Fixed Rate Mortgage

Risk minimization and Predictability

You are confident that your interest rate will not vary, and your monthly mortgage payments will remain constant throughout the remainder of the term. That consistency will make it much simpler for you to plan and stick to your budget.So in case, the interest rate rises during this period, you will end up paying less overall than you would have with a variable rate.

Competitive Rates

The 5-year term has traditionally been the most common choice, and lenders often advise you to choose that option. For house purchasers, this term length is a reasonable option. Lenders are aware of how highly competitive the 5-year fixed rate is, so they often give similar and cheaper rates.

Drawbacks/ Disadvantages of a 5-Year Fixed Rate Mortgage

Infringement fees

The majority of 5-year borrowers pay off their mortgage in less than four years (an average of 3.8 years). Therefore, a 5-year term increases the likelihood that you may incur penalties for paying off your mortgage early. The higher one between the interest rate differential (IRD) or three months’ interest will be charged as your penalty if you have a fixed mortgage rate.

When it comes to early termination fees, fixed rates might be far more severe when it comes to banks because they are determined using a bank’s stated rates rather than the bank’s actual rates.

Possibility of incurring higher interest costs

With a few notable exceptions, historically speaking, fixed rates have been offered at a more excellent price than variable rates. If market interest rates decrease while you are in the midst of your term, you are at the risk of having to pay a higher interest rate than you would if you opted for a variable rate.

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Offers shown here are from third-party advertisers. We are not an agent, representative, or broker of any advertiser, and we don’t endorse or recommend any particular offer. Information is provided by the advertiser and is shown without any representation or warranty from us as to its accuracy or applicability. Each offer is subject to the advertiser’s review, approval, and terms. We receive compensation from companies whose offers are shown here, and that may impact how and where offers appear (and in what order). We don’t include all products or offers out there, but we hope what you see will give you some great options.

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September 23, 2022
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FAQs about 5-Year Fixed Rate Mortgages

Canadian mortgage rates for five-year fixed terms are set by what factors?

5-year fixed mortgage rates are highly correlated with the value of five-year government bonds. When it comes to mortgage lending, banks need a reliable source of income to balance any possible losses, and bonds fill that need. If banks anticipate higher bond earnings, they will decrease their fixed mortgage rates and vice versa. But when inflation rates in Canada rise above average, the Bank of Canada is likely to raise its overnight rate, which in turn increases variable interest rates. Borrowers who want to avoid the swings associated with variable-rate mortgages could do well to lock in a fixed rate during these periods.

Why should I consider applying for a fixed-rate mortgage over a variable-rate mortgage?

When considering whether or not a fixed-rate mortgage is the best option for you, it's important to look at a variety of criteria, including how fixed mortgage rates have performed in the past. You may pay more, but you may avoid the anxiety of trying to forecast economic and interest rate fluctuations by locking in your rate for the duration of your term, no matter what happens to market interest rates.

Why do people get a 5-year mortgage term over other mortgage terms?

There are various reasons why people prefer a 5-year term compared to other mortgage terms. For instance, 5-year terms are often used when people:

  • want to find the most cost-effective strategy to lock in their interest rate for the long term.
  • would rather have a stable paycheck over a long period.
  • don't intend to raise, refinance, or pay off their mortgage any time in the next five years.

Should I apply for a fixed mortgage for three or five years?

3-year fixed-rate mortgages have lower interest rates than 5-year ones. That saves on interest charges, but you may have to renew at a higher rate after three years, losing money altogether. 5-year fixed-rate mortgages provide you with more prolonged periods of regular monthly payments than 3-year mortgages. In such a situation, you'll pay more interest than if you'd renewed after three years.

What is the cost of a mortgage with a fixed interest rate?

The terms of the mortgage will have an impact on this. In most cases, the price goes up as the contract duration does. It also depends on the size of your initial deposit and the amount of equity you have built up in your current home if you are planning on moving or refinancing your mortgage.

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