Find the Best 2-Year Fixed Mortgage Rates in Canada

History of 2-year fixed rate mortgages in Canada

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 rate mortgage pros and cons

Pros

These are some of the advantages of a 2-year fixed mortgage:

• Lower rates compared to longer terms: Shorter terms often offer better pricing compared to longer terms. In the case of one-year rates, they can be a decent discount compared to other short terms, such as two and three years. They’re also a great alternative to a floating rate when variable discounts are small by comparison, as was the case in spring/summer 2020.
• Less chance of paying prepayment penalties: For those who are unsure about their near-term life plans, locking into a longer fixed term can result in significant penalties should you need to break your mortgage early. With a one-year term, the odds of needing to break your mortgage before the end of the term are significantly reduced.
• Good for those who only need a short-term mortgage: A two-year term can be ideal if you only need a mortgage for roughly 24 months. Typical examples include property flips, credit rehabilitation and people with short remaining amortizations.
• Those who expect rates to fall within 12 months: A 2-year fixed mortgage can be a great “placeholder” term for borrowers who expect mortgage rates to fall in the next couple of years. A two-year term allows them to shop the market in just 24 months’ time. This is especially useful when variable-rate discounts are historically small (e.g., prime – 0.25% instead of prime – 1.00%).

Cons

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

• Little protection against rate hikes: If rates jump, you’re not protected as you would be with a longer fixed term.
• Renewal hassle: Many people choose slightly higher rates for a longer term, such as the five-year, in part simply to avoid the perceived hassle of renewing their mortgage so often. A two-year term may be a good one-off option depending on your circumstances, but choosing one-year terms regularly can indeed become a headache at renewal time.
• Switching costs: If you opt for a short term such as the 2-year fixed—particularly for consecutive terms—you are more likely to face switching costs if you end up changing lenders frequently.

Tips on getting a 2-year fixed mortgage

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.