Looking for the best mortgage type involves knowing your financial situation and future plans. A 4-year fixed-rate mortgage is a great option for homebuyers who are looking for a set interest rate with a short-term commitment. If you decide to go with a short mortgage term, it's easier to avoid prepayment penalties if you plan to sell your home in the near future.
When it comes to choosing the right mortgage term, you need to analyze your financial situation, goals and tolerance for risk. A longer fixed mortgage term allows you to lock in your interest rate for a significant period of time, such as five, seven or 10 years, and sometimes even longer..
On the other hand, short-term fixed mortgages often come with lower rates. A downside is that they offer less protection should interest rates fluctuate in the future. Compare the best 4-year fixed mortgage rates in Canada.
Learn more about fixed and variable mortgages.
Discounted 4-year fixed mortgage rates don’t tend to move with the same frequency of other fixed rates, such as the 3-year and 5-year fixeds.
Since 2012, 4-year fixed rates largely remained at or just below 3.00%, before falling to around 2.50% over the course of 2016 and 2017.
In the last three years, 4-year fixed rates rose to a high of 2.50% by early 2019, before falling below 2.00% in 2020.
The lowest 4-year fixed on record (as of November 1, 2020) is 1.56%.
If you want to try and predict where 4-year rates are headed in the short term, you can take clues from Canada’s 4-year government bond yield.
While mortgage rates don’t track bond yields precisely over the short term, they do generally follow medium- to longer-term movements.
Most mortgage shoppers don’t set out specifically in search of a 4-year fixed term. Instead, 4-year mortgage terms are often an afterthought.
On occasion, however, they can offer a decent balance between payment stability and interest expense.
Still, just 1 in 16 borrowers choose a 4-year fixed mortgage term, or about 6%.
Below, we explore more of the benefits and drawbacks of this largely overlooked term.
Most of the time, the 4-year mortgage doesn’t have a whole lot going for it. Except, perhaps, the following:
A Potential Goldilocks Term: The 5-year fixed term has long been the fan-favourite of Canadian homeowners. That’s despite the average 5-year fixed borrower breaking their mortgage after only 3.8 years. That means many would have been better off paying more for a 4-year term to avoid the often-crippling prepayment penalty of a 5-year fixed.
Price: Infrequently a 4-year fixed will have a lower rate than a 5-year fixed. If that discount is 15+ basis points (0.15%-points), it often makes sense to take your chance with a 4-year. In cases where 4-year and 3-year rates are similar, the longer term will keep you from having to renew a year earlier.
Here are some of the potential drawbacks of choosing a 4-year fixed mortgage:
Uninspiring Rates: There was a time when discounted 4-year fixed rates were lower than 5-year fixeds, but that’s not the case now, as of late 2020. Nationally available 4-year rates are often about 10 bps higher than comparable 5-year fixed rates. That’s largely due to greater liquidity and cheaper funding costs for 5-year mortgages.
Renewing Earlier Into a Higher Rate: If rates start to rise significantly over the next four years, the rate you renew into could be substantially more than your current rate. A longer term, such as the 5-year fixed, could provide an additional year of protection against rate increases. Just remember, you can always renew into a low-cost variable rate as well.
Higher Prepayment Penalties: Fixed-rate mortgages generally have higher penalties compared to floating (variable) rates. That could make breaking a 4-year fixed expensive. This is because fixed rates have what’s known as an interest rate differential (IRD) penalty. IRDs can often amount to 1-3% of your principal balance. The penalty for breaking most floating-rate mortgages, on the other hand, is just three months’ interest.
To qualify for a 4-year fixed mortgage, you generally have to prove you can afford monthly payments based on the “stress test” rate.
For uninsured mortgages (typically those with at least 20% equity), that stress test rate is the greater of the Bank of Canada’s posted 5-year fixed rate OR the contract rate plus two percentage points.
Insured mortgages (typically those with less than 20% down payment) are usually qualified at the BoC’s 5-year posted rate, a.k.a. the “minimum qualifying rate.”
For those who try their luck with a 4-year fixed rate, here are tips to consider to get the most out of this often forgotten term:
Some homebuyers in Canada choose a 4-year fixed mortgage term for the following reasons:
If this sounds like you, a 4-year fixed mortgage term can fit your mortgage needs. Your mortgage term should never make you feel trapped. The best mortgage is one that allows you to build equity in your home at a pace and rate that works within your budget.
Use a Mortgage Payment Calculator to see what your mortgage payments will look like and to get a sense of your potential mortgage costs.
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.