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.

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.