5-Year Cash Back Mortgage RatesRates Updated:
Mortgage rate The rate of interest you will pay on the outstanding balance of your mortgage. This rate can be fixed for the duration of the term or variable, fluctuating with the prime rate. Fixed rates are most popular in Canada and represent 66% of all mortgages.
Provider Mortgage providers include lenders and mortgage brokers. As the name suggests, lenders provide the funding for your mortgage. Mortgage brokers are licensed professionals with access to multiple lenders and products. According to the Canadian Mortgage and Housing Corporation, mortgage brokers accounted for 38% of mortgage originations in 2009.
Rate hold The rate hold is the time period, between 30-120 days, before your mortgage renewal date you are able to lock in the current mortgage rate. If rates go down further within this period, however, many lenders will honour the lower rate.
Prepayment Prepayment options outline the flexibility you have to increase your monthly mortgage payments or make a lump sum outlay against your mortgage as a whole. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 28% of mortgage holders used one or both prepayment privileges in 2010.
Payment The monthly mortgage payment is calculated based on the mortgage amount, amortization period and the associated mortgage rate. A general affordability rule is that your monthly housing costs should not exceed 32% of your gross household monthly income.
5% Cash Back
Lump Sum: 15%
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5% Cash Back
Lump Sum: 20%
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5-year Fixed Mortgage Rates
- Mortgage rate is fixed over 5-year term
- 66% of Canadians have 5-year mortgage terms
- 66% of Canadians have fixed mortgage rates
- 5-year mortgage rates are driven by 5-year government bond yields
5-year fixed mortgage rate defined
The '5' in a 5-year mortgage rate represents the term of the mortgage, not to be confused with the amortization period. The term is the length of time you lock in the current mortgage rate, while the amortization period is the amount of time it will take you to pay off your mortgage. The term acts like a reset button on your mortgage, at which point you must renew the mortgage at a rate available at the end of the term. So, for example, a typical mortgage has a 5-year term and a 25-year amortization period.
When the mortgage rate is 'fixed' it means that the rate (%) is set for the duration of the term, whereas with a variable mortgage rate, the rate fluctuates with the market interest rate, known as the 'prime rate'. So, for example, if the 5-year fixed mortgage rate is 4%, then you will pay 4% interest throughout the term of the mortgage.
An interesting feature of the 5-year fixed mortgage rate is that all borrowers must meet its standards of approval even if they choose a mortgage with a lower interest rate and shorter term. This benchmark is applied not only to reduce risk for the lender, but to give the borrower some breathing room.
Popularity of 5-year fixed mortgage rates
Mortgages by length of term and age group
|Term Length||Age group|
|1 year term||5%||7%||6%||6%|
|2-4 year term||27%||18%||12%||20%|
|5 year term||66%||65%||69%||66%|
|6-10 year term||3%||9%||10%||7%|
|>10 year term||0||0||2%||1%|
A 5-year mortgage term, at 66% of all mortgages, is by far the most common duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average.
A further breakdown of mortgage terms shows that an additional 8% of mortgages have terms exceeding five years, while 26% of mortgages have shorter terms, including 6% with one year or less and 20% with terms from one year to less than four years.
Fixed rates are also most common, representing 66% of total mortgages as well. In terms of age dispersion, fixed rate mortgages are slightly more common for the youngest age groups, and older age groups are more likely to choose variable rate mortgages.
Comparing 5-year fixed mortgage rates
You can think of the difference, or spread, between variable mortgage rates and fixed rates as the price of insurance that mortgage costs will not increase in the next five years, more or less.
The advantage of fixed rate mortgages is that you know exactly how much your mortgage payments will be regardless of whether rates rise or fall. You can, essentially, set it and forget it. This eases the budgeting anxiety that may follow a variable rate mortgage.
When interest rates are low, and the spread between shorter-term rates and the 5-year fixed mortgage rates is less significant, it is typically recommended that you lock in the 5-year rate. The longer term offers stability and, because rates are historically low, the chances of rates decreasing further with a variable rate are greatly reduced.
On the other hand, as is the case with all fixed mortgage rates, there is the potential to pay higher interest when variable rates are low, and, examined historically, variable rates have proven to be less expensive over time.
What drives changes in 5-year fixed mortgage rates?
By and large, the 5-year fixed mortgage rate follows the pattern of 5-year Canada Bond Yields, plus a spread. Bond yields are driven by economic factors such as unemployment, export and inflation.
When Canada Bond Yields rise, sourcing capital to fund mortgages becomes more costly for mortgage lenders and their profit is reduced unless they raise mortgage rates. The reverse is true when market conditions are good.
In terms of the spread between the mortgage rates and the bond yields, mortgage lenders set this based on their desired market share, competition, marketing strategy and general credit market conditions.