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What is a 2-year fixed mortgage rate?

Two-year fixed mortgages can be a useful term for those seeking upfront interest rate savings, but who don’t want to deal with renewing their mortgage each year.

While the 2-year fixed offers a good balance between short-term rate stability and lower mortgage rates, it’s not one of the most popular Canadian mortgage terms.

Just one in 14 rate shoppers, on average, take a 2-year fixed, according to Mortgage Professionals Canada. That’s because rate shoppers often have a number of better rate options.

For example, those wanting to lock in for just one extra year can sometimes secure a 3-year fixed at lower rates compared to a 2-year term. And 5-year fixed can offer significantly longer rate stability for a minimal rate premium.

Variable (floating) mortgage rates also make good alternatives to short-term fixed rates like the 1- and 2-year terms, depending on economic conditions.

That said, on occasion a lender will come out with a 24-month fixed promotion that is simply too good to pass up.

Below, we explore what you need to know about the 2-year mortgage term, including some of its benefits and drawbacks.

Benefits of a 2-year fixed mortgage

Homebuyers typically settle on a 2-year fixed rate under one of three conditions:

  • If the rate and monthly payment are lower compared to other terms (which currently isn’t the case, as of fall 2020)
  • If they require refinance flexibility. A 2-year allows you to renegotiate your mortgage in as little as 20 months, since most lenders allow you to lock in a rate hold three to four months before your term renewal. This reduces the odds of you needing to break your mortgage early, which could entail prepayment penalties.
  • If a borrower doesn’t expect to have their mortgage for longer than two years. Depending on your specific circumstance, a 2-year term may be all that you need, and a better option than getting two consecutive 1-year terms.
  • If you choose the right lender (not a major bank), breaking a two-year term early should only cost you three months’ interest the majority of the time.

Drawbacks of a 2-year fixed mortgage

Here are some of the potential drawbacks of choosing a 2-year fixed mortgage:

  • Less rate security: Two-year fixed rates offer little rate protection in rising-rate environments compared to longer terms. Granted, as of 2020, rising rates aren’t likely in the cards for at least a few years.
  • More frequent renewals: While not as bad as a 1-year term, two years can still fly by quickly. That means you’ll need to spend additional time renewing (about 3-6 hours if you need to change lenders for a better deal). It can also mean added switching costs if your existing lender is not competitive.
  • More expensive than variables: That’s true most of the time. And it’s particularly true when the Bank of Canada is cutting rates. The one exception is when financial crises shrink variable-rate discounts. In that particular case, short-term fixed rates can be temporarily lower than variables.

Predicting 2-year fixed mortgage rates

For those who want to try and predict where 2-year fixed rates are headed, keep a close eye on the Bank of Canada’s 2-year bond yield.

It’s not a precise indicator of rate movements over the short term, but over the long run, 2-year fixed rates tend to track 2-year bond yields relatively closely.

Two-year fixed rates track other short- and medium-term fixed rates as well. They’re generally within 20 basis points of 1-year or 3-year fixed rates, give or take.

History of 2-year fixed mortgage rates

Discounted 2-year fixed rates are currently at their lowest level in more than a decade.

They began the decade at around 2.75% and gradually trended downwards to just above 2.00% by 2016-17.

But in just the last three years, 2-year fixed rates reached highs of more than 3.00%. Compare that to nationally available discounted 2-year fixed rates of just 1.59% (for default-insured mortgages) and 1.84% (for uninsured mortgages), as of fall 2020.

2-Year fixed mortgage tips

For those choosing a 2-year fixed rate, here are a few tips to get the most out of this relatively unpopular short-term product:

  • Keep in mind that you can lock in your renewal rate in just 20 to 21 months, given that most lenders offer 90- to 120-day rate holds. Starting the renewal process early always affords you more options compared to leaving it to the last minute.
  • The majority of lenders don’t pay legal and appraisal costs if you’re switching into a 2-year mortgage. That’s typically a benefit offered on terms of three years or more. However, some lenders do, including most of the top banks. You’ll need to contact the lender directly to confirm what costs they cover.
  • To qualify for a 2-year fixed mortgage, you generally need to prove you can afford a payment based on the “stress test” rate – which is the greater of:
    • the Bank of Canada’s posted 5-year fixed rate
      • This is also referred to as the “benchmark rate” and “minimum qualifying rate” OR the contract rate plus two percentage points.
  • You may be able to get around having to qualify under the stress test if you’re applying through certain credit unions.
  • If you’re planning two take advantage of lower 2-year fixed interest rates before converting into a longer term at a later date, beware that many lenders offer inferior rates to those converting to longer fixed terms. Unlike a new mortgage shopper who has numerous options at their disposal, lenders know you’re a captive client in this situation and that your options are limited. Hence, you should be prepared to switch lenders when you go to lock in long-term.
  • Remember that just 1 in 14 Canadian borrowers opt for a 2-year fixed, on average. There’s often a good reason why the masses avoid particular mortgage terms.

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