Is a 5-Year Fixed Rate Mortgage Term Right For You?

by Cait Flanders February 17, 2014 / No Comments

Flickr: nerdcoregirl

Choosing a mortgage rate type and term are two of the most important decisions you’ll make in regards to your mortgage financing, and they aren’t always easy decisions to make. Should you go with a fixed or variable rate? And how long do you want to stick with that rate? Each option makes sense for different reasons, and there’s no one-size-fits-all solution. To shed some light on this topic, we interviewed several Canadian homeowners to see what mortgage types and terms they chose and why. Today, let’s look at what a 5-year fixed rate is and who is choosing them.

What is a 5-Year Fixed Rate Term?

First, a fixed rate term is exactly what it sounds like: you lock into one rate, which never fluctuates, for a specific period of time – in this case, 5 years. During that time, you will always know what your mortgage payment amount is going to be, because your rate is fixed and not attached to the market. Fixed rates are the most popular rate type chosen by Canadians. In fact, according to a study by the Canadian Association of Accredited Mortgage Professionals (CAAMP), 66% of all mortgage-holders in Canada had fixed rate mortgages in 2013.

Now, what makes the 5-year fixed rate term unique is that it’s considered the “benchmark rate” when it comes to qualifying all mortgage borrowers. Whether you want to get a variable rate, or you want to choose a term shorter than 5 years, you must qualify for the 5-year fixed rate set by your lender. This benchmark is meant to prove that you could afford a more expensive mortgage payment, if interest rates went up, as well as to provide you with some breathing room in your budget. So, if you were thinking of choosing a term with a lower interest rate, in order to increase your purchasing power, keep in mind that you will still have to qualify for the higher 5-year fixed rate.

Features of a 5-Year Fixed Rate Term

Here are some features of a 5-year fixed rate mortgage, which may or may not be reasons to choose it for your next mortgage term:

  • Your rate and payment amount stay the same for 5 years, which is great for budgeting purposes
  • However, your rate is often higher than what you could get with a shorter term or a variable rate type, meaning you will pay a premium for the stability of this fixed interest rate and payment amount
  • It can offer a sense of comfort and financial security to those who know they will be in their homes for at least 5 years
  • However, if you end up selling before your 5-year term is up, you will have to pay a prepayment penalty, which will be the greater of three months’ interest and the interest rate differential (IRD)

Profile of a 5-Year Fixed Rate Term Mortgage Holder

Toronto mortgage broker James Laird says, “a homeowner would choose a 5-year fixed rate term because of the stability of the payment, and because they know what their interest rate will be for the entire 5-year term.” He adds that, “the typical fixed rate customer is more risk averse than the average variable rate customer.” Is that true? Read our interview with 5-year fixed mortgage rate holder, Heather, to find out:

What type of home did you buy and in which city?

I bought a 1-bedroom, 2-bathroom condo in Toronto.

When did you buy your condo and what was the purchase price?

I purchased in January 2011 and it was $345,000.

Did you choose a fixed or variable interest rate? Why?

I brought my mortgage over from another home I owned before, but I went with a fixed rate at the time because I wanted to lock in a lower interest rate.

What interest rate did you get?

3.89%

Were you happy with your interest rate at the time?

Yes, I was.

Are you still happy with your interest rate now?

Since then, I have renewed. I now have a 5-year fixed rate of 3.19%.

Why did you choose that term?

I liked the interest rate, and I am planning to be a homeowner for the next 5 years, so it seemed like a wise decision.

What factors influenced your decision?

I looked at the housing market, as well as the outlook on mortgage rates. 3.19% is a low rate – and it’s lower than what I was paying before – so I felt comfortable with it.

Would you choose a 5-year term again? Why or why not?

Most likely. But I still have another 4 years in this term, and I would have to see what mortgage rates looked like after that. In 4 years, I’ll re-evaluate the market and the outlook on mortgage rates again, and make a decision from there.

If you think a 5-year fixed rate term is right for you, talk to a mortgage broker about getting today’s best mortgage rate.