What is a 2-year fixed mortgage rate?

Two-year fixed mortgages are sometimes a cost-effective term for those who seek upfront interest rate savings, but who don’t want to deal with renewing their mortgage every year.

But, while the 2-year fixed occasionally offers low mortgage rates and more convenience than a one-year, it’s not an overly popular mortgage term in Canada. In fact, just one in 14 rate shoppers, on average, take a 2-year fixed, according to Mortgage Professionals Canada.

That’s usually because rate shoppers have better rate options in most cases.

For example, those willing to lock in for one extra year can often secure a 3-year fixed mortgages at similar or lower rates. And sometimes, 5-year fixed can offer significantly longer rate stability for minimal or no rate premium.

Variable (floating) mortgage rates also make good alternatives to short-term fixed rates—like a 2-year term—depending on your holding timeframe, future intentions and economic conditions.

Below, we explore more of what you need to know about the 2-year mortgage term, including key pros and cons.

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
  • That’s currently not the case, as of fall 2020.
  • Albeit, lenders do come out with 2-year promotions on occasion, particularly in the spring.
• 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 the borrower doesn’t expect to have a mortgage longer than two years
  • Depending on your specific circumstance, a 2-year term may be all that you need, and a more convenient and/or cost-effective option than getting two 1-year terms.

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 much less rate protection in rising-rate environments compared to longer terms. Granted, as of 2020, materially rising rates may not be in the cards for multiple years.
• More frequent renewals: While not as bad as a 1-year term, two years still fly by quickly, requiring some additional time spent on the renewal process. It can also mean switching costs should you choose to move to another lender at renewal time.
• More expensive than variables: This is particularly true in falling rate environments, as fixed rates typically cost more compared to variable rates in these circumstances. But even if variable rates remained flat for the two years, the interest cost would generally still be slightly less than a 2-year fixed, historically speaking.

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 last ten years 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 around 3.25%. Compare that to nationally available discounted 2-year fixed rates of well under 2%, as of fall 2020.

Two-year fixed rates track other short- and medium-term fixed rates quite closely, generally within 20 basis points, give or take.