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The Best 3-Year Fixed Mortgage Rates

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3-year fixed mortgage rates

Three-year fixed rates have always been a “middle-of-the-road” mortgage choice.

They provide longer stability compared to shorter one- and two-year products, but don’t require as much of a commitment as, say, the ever-popular 5-year fixed.

Statistically, only about 7% of mortgagors pick 3-year fixed terms, according to Mortgage Professionals Canada.

Three-year fixed mortgage rates, like most terms, fell to historic lows over the course of 2020, falling under 2.00% for the first time.

In many cases, 3-year fixed rates can be a better choice compared to shorter terms since many include free legal fees on switches, and sometimes free appraisals too. That’s not available on most 1- and 2-year fixed rates.

Below we explore what you need to know about 3-year mortgage terms, including benefits and drawbacks.

Pros of a 3-year fixed mortgage

Here some of the advantages of a 3-year fixed:

  • Lower rates compared to longer terms: Three-year fixed mortgages typically offer lower rates compared to longer terms, such as the 5-year fixed, Canada’s most popular mortgage. The spread between the two can generally run from 20-40 bps in normal rate environments.
  • A good compromise between low rates and rate protection: The 3-year fixed provides borrowers with a balance between the interest rate savings of a shorter term and multi-year protection against rate increases.
  • Less chance of paying mortgage breakage penalties: A 3-year mortgage contract is the longest of what are considered short mortgage terms. Shorter mortgage terms generally mean less chance that the borrower will need to break the mortgage prior to maturity. Consider that most borrowers break their 5-year mortgage after just 3.8 years on average. Locking into a shorter mortgage contract means less risk of being charged exorbitant prepayment penalties, which are often the case with fixed-rate mortgages, particularly those offered by the Big 6 banks.
  • Refinance flexibility: A 3-year fixed offers greater flexibility for those needing to refinance their mortgage without limitation or penalty. After 36 months, you can freely switch lenders for a better deal if your existing lender refuses to play ball.

Cons of a 3-year fixed mortgage

The following are some potential drawbacks of choosing a 3-year fixed mortgage:

  • Less protection against rate hikes: A 3-year fixed term increases your odds of renewing into a higher rate – at least compared to a longer term like a 5-year fixed.
  • Fixed rates can have higher penalties: If you’re considering the 3-year fixed term as an alternative to a variable, keep in mind that penalties for breaking a fixed mortgage are often significantly higher.
    • Terminating a fixed-rate early usually means you’ll pay a penalty based on the higher of three months’ interest, or the Interest Rate Differential (IRD), a formula that compares your original interest rate to the rate a lender could re-lend the funds at today. IRDs often run into four or even five-digit dollar amounts.
    • Breaking a variable, or “floating” rate, on the other hand, usually involves a penalty of just three months’ interest.
  • Increased renewal frequency: Some borrowers don’t care about this but renewals can be a hassle when your lender isn’t competitive. Compared to a 5-year term, a 3-year requires more frequent paperwork, rate research and renegotiation.

Predicting 3-year fixed mortgage rates

If you want to try and predict where 3-year fixed rates are headed, we don’t recommend that. But if you want to try anyhow, look to Canada’s 3-year government bond yield.

The 3-year bond yield won’t tell you exactly where 3-year rates are heading, but they do provide a good roadmap near-term. If yields show a sustained upward trend, for example, chances are good that 3-year fixed rates will start trending higher as well.

History of 3-year fixed mortgage rates

Discounted three-year fixed mortgage rates have remained fairly stable over the past five years, typically ranging between 2% and 3%. As of September 2020, mortgage shoppers could find nationally available uninsured 3-year fixed rates for under the magic 2% mark.

At the time of the Financial Crisis back in 2008-09, discounted 3-year fixed rates surpassed 6% before trending downward in the following years.

Over the past decade, three-year fixed rates have generally:

  • moved in tandem with other fixed-term rates
  • generally been higher than 1-year rates but lower than comparable 5-year fixeds.
  • in 2020, however, the spread between 3- and 5-year fixed rates narrowed and even inverted, meaning you could find 5-year rates for less than similar 3-year terms.

3-year fixed mortgage tips

  • About 1 in 14 borrowers (7%) select 3-year mortgages, according to Mortgage Professionals Canada.
  • Those applying for a default insured 3-year fixed mortgage typically need to prove they can afford payments based on the posted 5-year fixed rate, also known as the “benchmark rate” or “stress test rate.”
  • Those applying for an uninsured 3-year must prove they can afford the greater of the posted 5-year fixed rate set by the Bank of Canada or the contract rate plus two percentage points.
    • There are some exemptions for those getting their mortgage through a credit union or other non-federally regulated lender.
  • Unlike most 1- and 2-year fixed rates, many lenders pay the legal and appraisal fees if you’re switching into 3-year terms and longer (except if you have a collateral charge mortgage or a mortgage linked to a line of credit).
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