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Jamie David, Business Director Mortgages
5-year fixed mortgages are the most common type of mortgage in Ontario, so it’s important to understand how to find the best possible rate. Ratehub.ca makes it easy to compare Ontario mortgage rates from the biggest banks, brokers, and other mortgage providers in Canada, at no cost to you. Read on to learn more about comparing Ontario 5-year fixed rates.
What are 5-year fixed mortgage rates?
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.
How much can I save comparing 5-year fixed rates in Ontario?
Your mortgage is likely to be the largest financial commitment you’ll ever make, and getting a better rate can save you thousands over a 5 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 $69,347 interest over 5 years. With a 2.75% rate you’d pay $63,454 interest over the term. So, a difference of just 0.25% can save you $5,893 over your 5-year term.
Why compare Ontario 5-year fixed rates with Ratehub.ca?
We make it simple to see current mortgage rates from all of Ontario'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.
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, 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.
|TERM Length||Age Group|
Are 5-year mortgages better than other mortgage terms?
5-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. However, 5 year terms offer a good compromise - they’re long enough to provide some stability, but short enough to not lock you in for a long time.
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, 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.
References and Notes
- Homeownership, mortgage debt and types of mortgage among Canadian families, Statistics Canada, 2019
- Annual state of the Residential Mortgage Market in Canada, CAAMP, 2010
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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