Find the best 1-year fixed mortgage rate

Whenever you're shopping for something, it's important to understand the different products available to you. That's also the case with mortgages!

Even though a 5-year term is the 'standard' mortgage in Canada, it's not the only option available to you. 1-year mortgage terms are extremely flexible and could be a good fit for your needs. 

What is a mortgage term?

The mortgage term, in this case, one year, is the length of time your mortgage rate is in effect. If you select a 1-year fixed-rate mortgage, you'll be able to select a new mortgage type, provider and associated mortgage rate at no penalty at the end of that year.

The mortgage term you choose depends on your expectations of future interest rates. For example, if you think mortgage rates will go up, you may want a longer 5-year term to lock in the current low rate. However, if you feel interest rates will fall, or you want to renegotiate your mortgage in a year's time, you might consider a 1-year mortgage rate.

1-year fixed mortgage rates: Quick facts

• Mortgage rate is fixed over a 1-year term
• Just 0.7% of all mortgage requests made on Ratehub.ca from January - December 2023 were for 1-year fixed mortgages.  
• Just shy of 13% of all mortgage requests made on Ratehub.ca from January - December 2023 were for short-term fixed mortgages with terms of 4 years or less. For the whole of 2022, however, only 6% of all mortgage requests made on Ratehub.ca were for short-term fixed mortgages. 
• 1-year fixed mortgage rates follow 1-year government bond yields

Comparing 1-year fixed mortgage rates

Most consumers are uncertain which direction mortgage rates will take in the near future. Further, many are unsure if a variable or fixed mortgage rate will better serve their finances. In these situations, a 1-year fixed rate lets you take more time to judge the market, without locking you into a long term agreement.

Since 1-year fixed mortgage rates are generally lower than 5-year fixed rates, in falling or flat interest rate environments, some consumers continually lock into a 1-year fixed mortgage rate year after year. However, a similar strategy can be achieved through variable mortgage rates, which are usually lower than 1-year fixed mortgage rates and can typically be converted to a fixed mortgage rate at no charge. 

Since the end of 2022 and throughout 2023, we find ourselves in an unusual situation where short-term fixed rates, including those for a 1-year fixed-rate mortgage, are significantly higher than 5-year fixed rates. This is a result of a series of interest rate increases by the Bank of Canada that have spurred many homeowners and home buyers to explore locking in rates for a shorter period. The perceived benefit of this strategy is to secure stability for the duration of one's term, but then to be able to take advantage of anticipated lower rates in the future. If you are considering this strategy, it's best to talk to a mortgage broker about it, as they can provide you with expert advice at no cost to you. 

1-year fixed vs. longer-term mortgage rates

1-year fixed rates are typically lower than the rates on longer mortgage terms, like 5 or 10 years. This is because longer fixed-rate terms lock in a lower rate for a longer period of time. That might be great for you, but it puts the risk of a rate rise onto your lender. The higher rate is, therefore, a premium for locking in today's rate for longer.

These relationships aren't always constant, however, especially in very low or high rate environments. You should always decide which term is best for you based on the current market and your present circumstances.

1-year rates vs. other mortgage term lengths (interactive graph)

Some homeowners opt for a 1-year fixed mortgage rate because they plan to move in a year. The problem with this strategy is that unless the homeowner is moving in exactly one year, they will incur a penalty for breaking their mortgage early. Thus, a variable mortgage rate often makes more sense in this case. This is because the refinance penalty, three months interest, will often be lower than refinancing a fixed mortgage.

Historical 1-year fixed mortgage rates

Looking over historical mortgage rates is the best way to understand which mortgage terms attract lower rates. They also make it easier to understand whether rates are currently higher or lower than they have been in the past.

Here are the lowest 1-year fixed rates of the year in Canada for the last several years, compared to several other types of mortgage rates.

Source: Ratehub Historical Rate Chart

 

The popularity of 1-year fixed mortgage rates

Though fixed-rate mortgages are very common, representing the majority of all mortgages in Canada, the 1-year mortgage term is one of the least popular terms, representing less than 10% of the market. The popularity of 1-year mortgage rates in Canada does not vary much by age.

What drives changes in 1-year fixed mortgage rates?

Fixed mortgage rates follow government bond yields, with 1-year fixed rates following 1-year government bond yields. Bond yields are driven by economic conditions, and the spread between bond yields and lender-posted mortgage rates vary by a lender's marketing strategy and general credit market conditions.