Find the Best 3-Year Fixed Mortgage Rates in Canada

What causes changes in 3-year fixed rates?

In the current economic situation, Canadians are faced with the rising interest rates, inflation and a global economic downturn.

Starting in March 2022, the Bank of Canada has raised the policy interest rate quickly and consistently — from 0.25% to 4.5%. This has resulted in borrowing rates going up for households and businesses, spending has declined, especially on housing.

The Bank of Canada’s overnight rate increase can have a significant impact on the yield of a 3-year bond. A higher overnight rate leads to increase in interest rates across the economy, including the yield on 3-year bonds.

When the Bank of Canada raises its overnight rate, the cost of borrowing for banks and other financial institutions generally increases. As a result, the yields on short-term bonds, including 3-year bonds, tend to rise as well. Conversely, when the Bank of Canada lowers its overnight rate, the cost of borrowing decreases and the yields on short-term bonds, including 3-year bonds, tend to fall.

In January this year, the Bank of Canada said it expects to pause rate hikes but this pause is conditional and depends upon whether the economy develops as per economists’ predictions and whether inflation continues to fall. With economic growth slowing to close to zero in the first half of 2023, inflation should drop to around 3% in the middle of the year and reach the Bank’s 2% target in 2024.

Pros and cons of 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.

History of 3-year fixed mortgage rates

In the past decade, 3-year fixed rate mortgages have remained stable, typically ranging between 2% and 3%. In September 2020, borrowers could even find nationally available uninsured 3-year fixed rates for under the 2% mark. However, with the Bank of Canada’s rate hike spree starting March 2022, 3-year fixed rates have risen historically, and even hovered around the 5-year fixed rate mortgage between 4% and 5%. At the time of the Financial Crisis back in 2008-2009, discounted 3-year fixed rates surpassed 6% before trending downward in the following years.

In a nutshell, three-year fixed rates have generally:

• moved in tandem with other fixed-term rates in the past decade,
• generally been higher than 1-year rates but lower than comparable 5-year fixed rates.
• 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.
• In 2023, the uninsured 3-year fixed rate is slightly higher than the 5-year fixed rate, but lower than 1-year, 2-year and 4-year fixed rates.