Did you know that not all mortgage terms are five years and that there are alternatives to a five year mortgage rate?

Surprisingly the number one mortgage term taken by people is for five years. It’s the term that most people ask for, it’s the term that the industry generally uses as the benchmark, and the term most lenders focus on with the rate advertising. But is it the best length of term? I had previously heard of surveys that indicate 75% of people who take a five year term break-it and for most that means a payout penalty, whether it is three months interest, interest rate differential, or a percentage of the outstanding balance, and most people talk about the average time someone stays in their home is only 3.5 years.

Note, since 2008, of the term of the mortgage if less than five years, is variable, or is re-advanceable, then the mortgage must be qualified using the Bank of Canada’s Benchmark Rate (i.e. banks posted rate). Today the Benchmark Rate is 4.64%. If the term is fixed and five years or greater, then the mortgage can be qualified using the contract rate (i.e. the actual mortgage rate the payments will be based on). So, for some, to maximize what they qualify for, a five year option is all that is available.

So, if a five year mortgage rate isn’t the best option for everyone, what are the alternatives?

With interest rates currently at incredibly low rates, and no real pressure for an immediate increase, it might make sense to look at a shorter term, especially if you want today’s lowest rates. Generally, a shorter term mortgage can offer a lower rate than the five year counterpart. For example, currently the best five year rate is 2.59%, the best 4 year rate is 10 points lower at 2.49%, the best 3 year rate is 30 points lower at 2.29% (lower than what is presently being offered with most variable rate mortgages), the best two year rate is 40 points lower at 2.19%, as is the best one year rate.

Alternatives to a Five Year Mortgage Rate

Three-year fixed:
Why? The three-year fixed currently offers a decent discount when compared to a five year fixed, it’s lower than what is presently available with a variable rate mortgage, and it provides three years of rate protection. This makes it a great alternative to a variable rate, especially for those with low risk tolerance. It’s also about the same length of time most people stay in their home, or stay with their mortgage, and if paying it out early and paying the interest rate differential penalty, it’ll offer at least a 24 months saving on the payout of a five year.

Four-Year fixed:
Why? The four-year fixed is less than a five year fixed. It provides an additional year of rate protection over the three year, and if breaking the mortgage and paying a payout penalty, it’ll be at least 12 moths cheaper, if paying the interest rate differential penalty, than the five year.

Hybrid Mortgage:
Why? It offers the best of both the variable and the fixed world. This is a great option for someone wanting a variable rate with the some added security of a fixed rate component. You can also structure your payments, to pay one component down faster than the other which can provide a significant amount of payment flexibility.

Regardless of which mortgage you choose, the decision should be based on what you can qualify for, what your risk tolerance is, and what your timelines are.

Working with the right mortgage professional can help steer you in the right direction.

Co-written with Martin Breeze, Mortgage Broker, TMG The Mortgage Group