Mortgage refinance: If you want to break your current mortgage contract and negotiate a new contract, that’s called refinancing. You may want to do this to take advantage of lower interest rates or access equity in your home. However, the decision to refinance should not be taken lightly, because you could end up paying significant penalty fees. If you want to see five-year mortgage rates on a mortgage refinance, enter your current mortgage balance, as well as the amount of equity you wish to access.
Home equity line of credit (HELOC): This is a revolving line of credit, for a pre-approved amount of money, that allows you to borrow from the equity in your home. The interest rates on HELOCs are usually lower than those for traditional lines of credit, but higher than those typically offered for variable-rate mortgages. The money borrowed through a HELOC is repaid, with interest, in addition to your regular mortgage payments.
How are five-year fixed mortgage rates determined in Canada?
Rates for five-year fixed mortgages are strongly linked to the price of five-year government bonds. Banks rely on bonds to generate stable profits and offset potential losses from the money they lend as mortgages. When banks expect their bond profits to increase, they lower their fixed-mortgage rates, and vice versa.
Historically, fixed rates have tended to hover above variable rates, however there are a few instances when variable rates have surpassed fixed rates. This historical trend suggests buyers may end up paying more for fixed mortgages, especially during periods of falling interest rates.
However, when Canadian inflation rates exceed the norm, hikes in the Bank of Canada’s overnight rate—which lead to higher variable interest rates—are often not far behind. At times like these, locking in a fixed mortgage rate could be a smart option for borrowers who want to avoid the fluctuations that come with variable-rate mortgages.
The pros and cons of five-year fixed rate mortgages
- Competitive rates: Lenders know you are shopping around and they will generally offer comparable and lower rates for your business.
- Predictability: You know your interest rate, and therefore your mortgage payments, will not change for the duration of the term. That stability can help you budget more easily.
- Potential to save money: If interest rates increase during your term, you could end up paying less than you would with a variable rate.
- Stiffer penalties: The penalty to get out of a fixed mortgage contract can be quite a bit higher than with a variable mortgage. You may also be more limited in your ability to pay off your mortgage faster through additional payments.
- Potential to pay more in interest: Historically, fixed rates have been priced higher than variable rates, with a few exceptions. In some instances, you could end up paying significantly more in interest than you would with a variable rate, if market interest rates fall during your term.
- Higher cost: You will pay for predictability and peace of mind. When comparing fixed to variable rates, you will see that fixed can be slightly higher.
Is a fixed-rate mortgage better?
Kim Gibbons, a mortgage broker with Mortgage Intelligence in Toronto, say both fixed and variable rates each have their benefits and their downsides, so it’s crucial for buyers to consider whether they value stability over potential savings.
“When my clients are trying to determine whether to go with a variable or a fixed rate, I tell them that they need to really look at their risk tolerance and whether or not they have enough income or savings to provide a buffer to handle a sudden increase in rates,” she says. “If they are going to lose sleep at night worried that interest rates are going to go up and they have a limited budget that they can’t go beyond, then a fixed rate is likely a better move. If, however, they have good incomes and a lot of savings put aside then they can better handle fluctuating rates.”
“It really depends on each person’s circumstances,” adds Gibbons. “There’s no single solution that’s right for everyone.”