Why the 5-Year Fixed Mortgage Product?

In Canada, a 5-year fixed mortgage is the most commonly selected home lending product. Widely popular due to their protection against quick interest rate spikes and their constant interest rate for the entire term, most home owners tend to lock-in for 5-years over other options. Some of this trend could be traced back to the 1980’s when homeowners experienced huge interest rate increases and created quite a scare.

We follow the crowd to avoid making a mistake

Some say that history is important because it helps us from making the same mistakes in the future. In this case, a large number of home owners flock to the 5-year fixed product simply because it is what “everyone else is doing,” but do not realize why it has become so popular. Big banks and mortgage brokers noticed the 5-year fixed trend so long ago that they now spend most of their advertising dollars promoting this particular product, while leaving the many other options for those who specifically request them.

Understand the advantages of other mortgage products

While a 5-year fixed mortgage will work for most borrowers, there are many cases where another option could have saved thousands for the homeowner. With Canadian consumers spending so much time researching computers, mobile phones, cleaning products for their homes, and vehicles, why are we not spending more time to understand the different features available when taking out a mortgage?

Sure, a mortgage doesn’t provide the same instant gratification that a new mobile device or vehicle can provide, but the amount of money you could save over the term of the mortgage agreement should be motivation enough!

Common Fixed-Rate Mortgage Terms

There are too many different mortgage options to list in a single article, but below we have listed some of the more common you will see inside your big bank or mortgage broker’s office:

• 6 month
• 1 year
• 2 year
• 3 year
• 4 year
• 5 year
• 7 year
• 10 year

It is important to understand that the shorter the mortgage term, the lower the interest rate will be. This is because economists, nor the lenders, can accurately predict what interest rates will do in the future. By locking into a longer-term mortgage, the lender could lose out on possible profits if interest rates were to increase. Inversely, a shorter mortgage term reduces the risk of losing profits for the lender and thus they can offer a better rate.

If you are conservative and would rather know what rate you will pay for the next 10 years, it may be worth it for you to pay a higher rate and lock-in for a longer period of time. If you are more aggressive, shorter terms may be a better option.

Variable-Rate Mortgages

A variable-rate mortgage has a “floating” interest rate which follows the Prime Interest Rate. Almost always a variable-rate mortgage will offer a lower interest rate than any fixed rate, but the unpredictability of future rates can be unsettling for many borrowers. If you are less-conservative and can afford to pay a higher rate of interest on your mortgage in the future, then maybe a variable rate mortgage is right for you.

How To Choose?

Sometimes it is important to put yourself into a particular scenario to gauge what type of borrower you are. How would you feel if:

• You locked in long-term, paid a higher rate of interest, and interest rates were continuing to drop.
• You locked in short-term, paid a lower interest rate, and notice that rates are starting to spike upwards right when your mortgage renewal date arrives.
• You locked in for 5-years, agreed to a variable mortgage, and rates have risen higher than the 5-year fixed rate you could have locked into.

Thinking of how you would feel in the above situations should give you a good starting point when deciding what type of mortgage you would feel most comfortable with.

Don’t do it alone

No homeowner should have to make their mortgage decisions alone. While it is important to understand what is available, be sure to allow your trusted Mortgage Centre Specialist assist in guiding you to the product which best suits the needs of you and your family.