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Jamie David, Business Director Mortgages
A 2-year fixed mortgage will have a constant rate of interest over a term of two years. The term should not be confused with the amortization period, which is the length of time it takes to pay off your mortgage. The term, rather, is the period you are committed to the contractual provisions and mortgage rate with your lender.
2-year terms are not popular in Canada, representing a tiny portion of all mortgages. However, they can be a very useful mortgage rate type if you're looking for a little more flexibility.
2-year fixed mortgage rates: Quick facts
- 20% of Canadians have mortgage terms between 2-4 years (Source: CAAMP)
- 74% of Canadians have fixed mortgage rates (Source: Statistics Canada)
Comparing 2-year fixed mortgage rates
There are a few reasons to consider a a short-term rate like the 2-year fixed mortgage rate. If you think rates will fall, shorter terms are more strategic. Instead of being locked in to a rate for 5-10 years, you'll be able to take advantage of low rates when your mortgage is up for renewal. Of course, if rates rise during your term, you would have been better off with a longer term.
Short terms are also sensible if you are likely to break your mortgage within a few years – like, for example, if you want to upgrade your home. Going with a 2-year term over a 5-year term could save you a considerable amount of money in penalty costs.
2-Year Fixed vs. Longer Term Mortgage Rates
2-year fixed rates are typically slightly lower rates than longer terms (like 5 or 10 years) and higher rates than short terms, like 1-year rates. This is because longer fixed-rate terms lock in a lower rate for 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 a lower 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.
Here are some of the most common question we're asked about 2-year fixed mortgage rates. If your questions aren't answered here, your next best bet is to book a free consultation with a mortgage broker near you.
What are 2-year fixed mortgage rates?
The '2' in a 2-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. A mortgage might, for example, have a 2-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 2-year fixed mortgage rate is 4%, then you will pay 4% interest throughout the term of the mortgage.
It's worth noting that all borrowers, even those applying for a 2-year term, will need to meet the standards of approval for the 5-year mortgage rate. This is a standarized benchmark applied to reduce risk for the lender, and to give the borrower some breathing room.
How much can I save comparing 2-year fixed rates?
Your mortgage is likely to be the largest financial commitment you’ll ever make, and getting a better rate can save you thousands, even over just a 2-year term. Even a slightly lower mortgage rate can result in big savings, especially early on in your mortgage.
For example, on a $500,000 mortgage with a 25 year amortization period, a rate of 3.00% would see you pay $29,029 interest over 2 years. With a 2.75% rate you’d pay $26,600 interest over the term. So, a difference of just 0.25% can save you $2,429 over your 2-year term.
Why compare 2-year fixed rates with Ratehub.ca?
We make it simple to see current mortgage rates from all of Canada’s leading mortgage providers in one place. We have rates from the big banks, smaller lenders, as well as mortgage brokers across the country. This makes it easy to see who offers the best rates in Canada in real time, at no cost to you.
Why are fixed rates different to variable 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.
Are 2-year mortgages better than other mortgage terms?
2-year mortgage terms aren’t necessarily better than other terms. You should pick a term length based on your financial needs and current situation, as well as what rates are on offer. 5-year terms are the most popular in Canada, as they offer a compromise between stability and flexibility. However, if flexibility is important to you, a 2-year term could be worth considering.
Jamie David is the Business Director of Mortgages at Ratehub.ca. A graduate of the Systems Design Engineering program at the University of Waterloo, she has over 15 years of business, marketing, and engineering experience in the financial technology, banking, education, energy and retail industries. She has worked in top organizations like TD Bank, Trading Pursuits, Petro-Canada, and the TTC. Her passion for personal finance, investing, education, and business strategy brought her to Ratehub.ca where she heads a very talented, cross-functional team that is dedicated to providing Canadians with the best mortgage experience all the way through from online search to (keys-in-your-hand) funded mortgage.
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