You'll be redirected in a few seconds. Please don't exit this window.
If you are not redirected within 30 seconds, please click here to continue.
If you are not redirected within 30 seconds, please click here to continue.
If you are not redirected within 30 seconds, please click here to continue.
If you are not redirected within 30 seconds, please click here to continue.
Rates are based on a home value of $500,000
Rates are based on a home value of $500,000
Rates are based on a home value of $500,000
According to data from Mortgage Professionals Canada, only about 5-6% of Canadian mortgage shoppers choose a 12-month term.
That said, they may be the perfect choice for some mortgage shoppers.
In mid-2020, 1-year fixed rates attracted attention by becoming the first contract mortgage rates to fall below 1.40% in Canadian history. For that reason, they remain a solid alternative to a variable rate.
Below we explore what you need to know about the 1-year fixed mortgage term, including its benefits and drawbacks.
One-year fixed mortgages are the shortest fixed-rate mortgages a prospective homeowner can get. Current 1-year fixed mortgages are popular for many reasons:
For the risk-averse person, a 1-year fixed mortgage rate in Canada allows a borrower to avoid the risk of a rate increase during the mortgage term. But there are risks, of course.
Suppose you have a $400,000 mortgage with a 25-year amortization schedule, and you take a 1-year fixed mortgage with an interest rate of 5.65%. A year passes, and now rates are 200 basis points higher. When your mortgage renews, your payments will increase by $472 or $118 per month per $100,000 borrowed.
Most Canadians choose longer terms (the most popular term is five years) and put up with a slightly higher rate to avoid such problems at renewal. The amount of paperwork that accompanies new mortgage negotiations is also inconvenient for most.
One-year fixed mortgage rates in Canada, like all interest rates, follow government bond yields, except in this case, they follow 1-year government bond yields.
Bond yield is a way of measuring the annual return on a bond investment. A bond's yield is expressed as a percentage. At the time of issuing, each bond comes with a face value and a fixed amount of interest amount that it pays, known as its coupon rate. Then when bonds are bought and sold on the open market, they may sell for above or below the face value.
Banks are quicker to raise their fixed mortgage rates and slower to lower them in relation to bond yield movements. They can’t be too reactive to changing market conditions if they're to remain solvent.
As inflation has steadily risen, so have interest rates. As a result, bond yields have been steadily climbing since late spring 2022.
Bond prices have an inverse relationship with mortgage interest rates. As bond prices increase, mortgage interest rates go down and vice versa. This is because mortgage lenders tie their interest rates closely to Treasury bond rates.
When bond interest rates are high, as they are becoming now, the bond is less valuable on the secondary market. This causes mortgage interest rates to rise. The value of each bond goes up when bond interest rates fall again. This causes mortgage lenders to lower their rates. However, we are still in a situation of rising interest rates and bond yields for the time being.
| Date | 1-year conventional mortgage rate | 1 - 3 year Government of Canada marketable bonds (average yield) |
|---|---|---|
| 2020-07-15 | 3.09 | 0.24 |
| 2021-01-13 | 2.79 | 0.16 |
| 2022-03-23 | 2.94 | 1.99 |
| 2022-03-30 | 2.99 | 2.21 |
| 2022-04-06 | 3.09 | 2.28 |
| 2022-04-27 | 3.29 | 2.47 |
| 2022-05-11 | 3.49 | 2.66 |
| 2022-05-25 | 3.79 | 2.48 |
| 2022-06-15 | 4.29 | 3.24 |
| 2022-06-22 | 4.69 | 3.22 |
| 2022-06-29 | 4.74 | 3.12 |
| 2022-07-27 | 5.19 | 3.09 |
| 2022-09-14 | 5.39 | 3.72 |
| 2022-09-21 | 5.69 | 3.73 |
| 2022-10-05 | 6.09 | 3.83 |
Source: Bank of Canada
All fixed-rate mortgages are influenced by the bond market. Mortgage lenders invest in bonds and mortgages for profit. The profits are then recycled to purchase more bonds and issue more mortgages. Here's a list of the sources lenders rely on to finance mortgages:
To figure out the interest amount to charge on a fixed-rate mortgage, lenders look to the interest they're earning on bond investments.
The government bond market in Canada broadly dictates fixed-rate mortgage rates. A five-year fixed rate, for instance, will track the five-year Government of Canada bond.
When bond yields rise, so do fixed-mortgage rates.
In the two years following the emergence of the COVID pandemic, Canada's economy expanded beyond economists' expectations. Consumer demand for goods (including houses) was overwhelming, causing inflation to rise. In 2022, the Bank of Canada began an aggressive rate increase strategy to help bring down demand and inflation.
The Bank of Canada's decision to raise overnight rates led to a rapid surge in bond yields. As the bank drove up the cost of borrowing, the interest paid on bonds began going up, and mortgage rates quickly followed.
This was a stark reversal from late 2020 to early 2021, when bond yields and, conversely, mortgage rates bottomed. Mortgage lenders offered some of the lowest mortgage rates in history during this period.
Looking back at the performance of 1-year fixed rates in Canada, they have remained fairly stable over the past decade, with discounted rates most recently sliding to their lowest level on record.
Posted conventional 1-year fixed rates have steadily fallen ever since their peak of more than 20% reached in the early 1980s. Since the Financial Crisis of 2008-09, posted 1-year rates have remained roughly between 3.00% and 3.50%.
Historically, 1-year rates have tracked the performance of variable rates quite closely. More specifically, when deeply discounted, they have outperformed every other term besides a variable — over decades.
Advantages of a 1-year fixed mortgage
Here's the upside to choosing a 1-year fixed mortgage:
Cons of a 1-year fixed mortgage:
The following are some of the potential drawbacks of choosing a 1-year fixed mortgage:
If you want to try and guess the trend for 1-year fixed rates, you can watch Canada's 1-year Treasury bill yield.
Note that this doesn't yield a forecast for future rates, but over the long term, 1-year fixed rates track the 1-year Treasury bill yield fairly closely.
Inflation continues to be high, and the Bank of Canada has indicated more interest rate hikes may be ahead. With increased rates comes lower demand for bonds and treasuries, ultimately dropping the price of bonds and raising interest rates once again.
One-year fixed rates have one of the shortest commitments of any mortgage term, which is why they often have the lowest rates on the market, even lower than floating rates at times.
Studies show that 1-year terms perform similarly to variable-rate mortgages regarding total interest cost.
Here are some 1-year fixed-term tips and how to make the most of this short-term mortgage product:
We've got answers to some of the most common questions about short-term mortgages.
Finding the best current 1-year fixed mortgage rate in Canada starts with comparison shopping. RATESDOTCA is the one-stop shop that allows you to compare the best rates in the easiest way possible. Major banks and mortgage brokers are at your fingertips and ready to help.
Much like any other mortgage term, you will need to renegotiate or find new financing terms for a new mortgage. You may choose another 1-year fixed mortgage rate, should that satisfy your short-term lending needs. Or, if you're ready to commit, you may choose a longer-term mortgage rate. It all depends on your needs and the cost of borrowing at the end of your 1-year term.
A mortgage refinance can be done anytime, not just at the end of your term. You can take out money for things such as debt consolidation. However, you will be penalized for refinancing before your term ends. Keep in mind that over the short term, interest rates can fluctuate, especially in today's market climate.
A mortgage rate lock allows you to reserve an interest rate for a set period while renewing, refinancing or applying for a mortgage. Mortgage rate locks allow prospective homeowners to get the best mortgage rate available if interest rates increase.
Stay on top of our latest offers, relevant news and tips!
