Find the best 5-year fixed mortgage rate

Source: Ratehub Historical Rate Chart

 

The popularity of 5-year fixed mortgage rates

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. Its popularity reflects a risk-neutral average.

A further breakdown of mortgage terms shows that:

• 8% of mortgages have terms exceeding five years,
• 26% of mortgages have terms of less than five years,
• 6% of terms are one year or less, and
• 20% of mortgages terms are between one and four years.

Fixed rates are also more common than variable rates, representing 74% of all mortgages. In terms of age dispersion, fixed-rate mortgages are slightly more common for the youngest age groups, while older age groups are more likely to choose variable-rate mortgages.

(Source: CAAMP)

What drives changes in 5-year fixed mortgage rates?

By and large, 5-year fixed mortgage rates follow the pattern of 5-year Canada bond yields. 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.

5-year fixed rates vs. 5-year bond yields

From 2000 - 2020

The bottom line: Should you get a 5-year fixed mortgage rate?

The 5-year fixed-rate mortgage is a good compromise between cost, flexibility, and stability. As such, it's a good fit for many borrowers. As long as you're happy locking in today's rate for the next 5 years, a 5-year fixed-rate mortgage could be a good choice.

You will, however, want to be confident that you won't want to refinance your mortgage or sell your home in the next 5 years. Fixed-rate mortgages can be very expensive to break, because of the way that prepayment penalties are calculated. So, it's quite important to avoid breaking your mortgage at all costs! If you need more flexibility, it might be a good idea to consider a variable rate or an open mortgage instead.

If you're still not completely sure what the best choice is for you, it could be worth speaking to a licensed mortgage broker. Broker consultations are free and will give you the expert advice you need to make the right decision. A broker may also be able to find you a better mortgage rate when you're ready.