In a 5-year mortgage, the “five” is the mortgage terms and not the amortization period. The terms you get is the length of time that you lock in your mortgage rate. We refer to the amortization period as the time it will take to pay off the mortgage. The term is a reset button on the mortgage and once it’s expired, you must renew the mortgage at the rate available once the current term is over. A typical mortgage will have a 5-year term and need to be paid off in 25 years which is the amortization period.
5-Year Fixed Mortgage
When you have a fixed mortgage, this means that the rate or percentage is set for the length of the term. A variable rate mortgage will fluctuate along with the interest rate of the current market which we call the prime rate. If the rate for a 5-year fixed mortgage is 4%, this means you’re paying 4% interest through the mortgage term.
For the 5-year fixed mortgage, a borrower must meet the approval standards even they get a mortgage that has a lower interest rate and a term that’s shorter. This helps reduce the risk for the lender, but it also gives a borrower some room.
Popularity of 5-Year Fixed Mortgage Rates
5-year mortgage terms account for around 66% of all mortgages. The five-year term is set between the one and ten-year terms and therefore it’s popular due to the neutral risk. Another 8% of mortgages have terms which are above five years and around 26% of them have terms that are shorter. Around 6% of them have terms of one year and 20% have terms that are less than four years.
The most common mortgage is the fixed-rate and they represent 66% of all mortgages. In the younger age group, the fixed rate is more common while older borrows tend to pick the variable rate more often.
Rates for 5-Year Fixed Mortgages
Most people tend to choose the 5-year fixed mortgage when rates are rising. When the spread between the variable and fixed rates is small, the number of borrowers that pick the fixed rate goes up even more.
The five-year term is the longest Canadian mortgage that you get that has competitive rates. When you have a term above five years these are not worth the added interest.
Why You Should Get a 5-year Fixed Mortgage
- You want the interest rate to be locked in for a long time and want to do this cheaply.
- You want a payment that doesn’t change for a few years.
- You don’t have plans to refinance, increase, or pay off your mortgage before the 5-year term
Disadvantages of the 5-Year Fixed Term
- If you terminate the terms early, then there will be higher penalties. Bank penalties from major banks can be extreme as they will work form the posted rates of the bank and not the actual rate.
- 5-year borrowers tend to break the mortgage in around 3.8 years. The five-year term can raise the probability that you pay a penalty to get out of the mortgage early
- A longer-term costs borrowers additional interest when compared to a short-term or a variable rate.
More Information About 5-Year Fixed Mortgage Rates
- A 5-year fixed rate becomes popular when the spread between the variable and fixed rates is narrow such as ½ of a percent.
- A lender tends to pay the appraisal and the legal fees when you move into a 5-year mortgage.
- This type of mortgage is easier to raise capital. Since this type of fixed rate mortgage is popular, there are more investors. The rates for the 5-year term stay very competitive in the industry.
- If you’re locking in a floating-rate mortgage, you probably won’t get a decent 5-year fixed rate. A lender will usually offer poor conversion rates to these sorts of borrowers and the rates can be around 20-30 points higher than 5-year fixed rates which are offered to new customers.
- Rates can be quite low when you compare them to other mortgages.
Summary
Talk to your financial advisor about 5-year fixed rate mortgage to determine if this type of mortgage is right for you. Your needs and requirements may be different, and another mortgage may be better suited for you.
