The length of your mortgage term is very important. It can be costly to break your mortgage, especially when you’re with one of the big banks. You could face a five-figure mortgage penalty if mortgage rates happen to drop a lot when you first signed up.
However, according to survey information collected by the Canadian Association of Accredited Mortgage Professionals (CAAMP), The five-year fixed rate mortgage
the most popular mortgage term, about two thirds of Canadians making that choice.
In fact, survey data from CAAMP indicates that fixed mortgages account for about 60 percent of all mortgages in Canada, while variable mortgages are chosen 30 percent of the time and a combination of fixed/variable mortgages selected by nearly 10 percent of mortgage customers.
Fixed-rate mortgages are available in many different terms most commonly in the 1-year to 10-year range, with the interest rate usually increasing the longer the term.
The stability of the interest rate across the 5-year term and ability to stick to a budget over those years are obviously things important in selecting a 5-year fixed closed mortgage. Also, those going for the 5-year term likely expect to be in the home or retain ownership for that period.
If that's not the case, and you want to break out the mortgage before the 5-year term, there may a substantial penalty issued by the lender. Opportunities to increase the regular payments and make yearly lump sum contributions up to a percentage limit have been added by most lenders in their 5-year fixed mortgage offers
Those evaluating other mortgage options might examine the 5-year variable rate mortgage that contains an interest rate, which fluctuates with the Prime Rate set by the Bank of Canada. If the Prime Rate goes up, the variable rate will increase and result in more being paid towards the interest and less towards the principal (the opposite is also true). As you know, a fixed-rate mortgage will be unaffected by changes in the Bank of Canada rate for the entire term.
While the notion of interest rate decreases during the term of the variable mortgage makes some people take the risk, many flock to a fixed term mortgage where payments will not be impacted. The savings might be realized with the variable rate if rates decrease during the term, but the potential risk of rate increases remains too much for some mortgage customers.