Is a short-term fixed-rate mortgage right for you?
Jordan Lavin
This post was first published on October 31, 2022, and was updated on October 1, 2025.
Key takeaways:
- A shorter-term fixed mortgage offers borrowers greater flexibility when rates are poised to fall.
- Mortgage rates may decline in the second half of 2025.
- Borrowers’ risk appetite is the best indicator of the type of mortgage they should choose.
Good news for Canadian borrowers: Mortgage rates have been on the decline in the second half of 2025, and there could be more rate cuts to come before the year is through. Following the Bank of Canada's most recent 25-basis-point rate cut on September 17, variable mortgage rates are now at lows not seen since 2022. Fixed mortgage rates have also decreased in recent months, as economic unease has led to lower bond yields. It's possible that both types of mortgage rates could trend lower, should economic data support further rate cuts.
While that’s promising news in general for borrowers, it does pose a conundrum for those looking to get a mortgage now, whether for a new home purchase, or those coming up for a renewal. It’s only natural that borrowers want to take advantage of the anticipated lower rate environment. But what if you need to make a decision now?
There are two main tactics these borrowers can take. One is to take out a five-year variable mortgage rate with the expectation that it will lower materially once the Bank of Canada cuts its Overnight Lending Rate. The other is to take out a shorter-term three- or two-year fixed mortgage rate. This provides some shelter from short-term volatility in the mortgage market, but also offers the flexibility to take advantage of the lower interest rate environment that may occur in the near future.
This strategy is an interesting idea in theory – but is it the best way to go in practice? Let’s explore whether a short-term fixed-rate mortgage could be right for you.
Also read: Bank of Canada cuts target interest rate to 2.5% in September 2025 announcement
What is a short-term fixed-rate mortgage?
While most Canadians sign up for a mortgage that needs to be renewed after five years, shorter terms are available. You can get a fixed-rate mortgage with a term of as little as one year.
Historically, lenders have offered lower rates for shorter mortgage terms because they have more certainty about how much it will cost them to lend you money. The spread between the best 5-year fixed rate and the best 1-year fixed rate has historically been 40 basis points (bps), or 0.40%.
Currently, the lowest mortgage rate in Canada is for a three-year term at 3.69%. This is 25 basis points below the lowest five-year fixed option at 3.94%.
Why would I want a short-term fixed-rate mortgage?
With much uncertainty about what’s to come for the economy, you may want to buy some time before committing to a longer-term mortgage. A short-term mortgage could keep your rate and payment the same for a year or two, at which time you might have better information with which to make a decision.
If you believe that rates will come back down, you might not want to lock into a longer term. A short-term mortgage would afford you the opportunity to take advantage of lower interest rates when it’s time to renew.
Given today's lowest 3-year fixed term is lower than that of a five-year fixed, if you were to lock in today, you would see savings over that initial three-year period, and would hopefully have access to a lower rate at renewal time, regardless of its term length.
Let's take a look at how much less you'd pay over this three-year period with today's lowest rates, based on a home price of $500,000, and a 5% down payment:
- 3-year fixed rate: 3.69%
- Monthly payment: $2,516
- Total paid after 3 years: $90,583
vs: - 5-year fixed rate: 3.94%
- Monthly payment: $2,582
- Total paid after 3 years: $92,970
- Total paid after 5 years: $154,950
Regardless of the next length of mortgage term you take out after your initial term is done, you’ll see savings of $2,387 over the initial three-year period.
Now, at renewal time, let’s say you opt to go for a five-year term; it’s impossible to know where rates will be at, but let’s assume they’re the same as today, at 3.94%.
Over the first two years of that five-year term, you’d pay a total of $61,980 on your mortgage. Combined with the first three-year term amount, you’d pay a total of $152,563, vs. $154,950.
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Are mortgage rates likely to fall over the next year?
While it’s likely that mortgage rates will fall over the next 12-month period, it’s still uncertain by how much.
According to Ratehub’s chart of historical mortgage rates, it would be an anomaly for rates to fall more than 1% over a 12-month period. While rapid swings were more common during the market volatility of the 1980s and 90s, a drop of that size hasn’t happened since the Great Recession of 2008-09.
Analysts are anticipating the Bank of Canada could cut rates twice more at 0.25% each by the end of 2025; doing so would bring the lowest 5-year variable mortgage rate to 3.2%, which is still quite elevated when compared to the previous few years.
While fixed mortgage rates have decreased somewhat since the start of the year due to fluctuations in the bond market, this has been by no means a smooth downward trajectory; bond yields continue to be volatile, reacting sharply to new economic data. The possibility fixed mortgage rates could rise higher this year remains very real.
What does all this mean for what mortgage term I should choose?
It’s also worth noting that it’s much more affordable to break a fixed mortgage when rates are rising. That’s because the formula used to calculate your penalty (the interest rate differential, or IRD) describes how much money the lender theoretically stands to lose. In times of rising rates, your lender is less likely to lose money if you break your mortgage, so the penalty for doing so is therefore much lower.
What can I do to save money on my mortgage?
Without a crystal ball to see the future, it’s impossible to know how mortgage rates will change. Instead of trying to game the system, if your appetite for risk is low, choose a mortgage that will give you a predictable payment and protect you from economic volatility.
If rising rates are making it difficult to afford your mortgage payments, your lender or mortgage broker may be able to help. They’ll be able to give you a better sense of your options and how you might be able to lower your monthly payments – or at least stop them from rising.
The bottom line
If you are risk-averse and worried about today's rising rate environment, choose a 5-year fixed-rate mortgage that will keep your payment predictable for the longest reasonable timeframe for the best results. Be sure to compare mortgage rates online and work with a mortgage broker to find the best mortgage rate to lock in.