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Rates are based on a home value of $500,000
Rates are based on a home value of $500,000
Rates are based on a home value of $500,000
The interest rate on a fixed-rate mortgage remains the same throughout the term of the mortgage. It does not increase or decrease with the change in overnight prime rate by the Bank of Canada, unlike a variable rate which rises or falls with every rate change. A 5-year fixed-rate mortgage stays the same for the five-year period of the mortgage term. The interest rate and mortgage payments do not increase or decrease until it's time for renewal or the borrower decides to refinance.
The term of the mortgage is five years. This refers to the length of time the provisions of your mortgage are in effect. If the borrower decides to get out of the mortgage before the end of five years, they will have to pay a penalty or prepayment charge to the lender.
The 5-year fixed-rate mortgage is a popular choice among homebuyers. About 66% of mortgage holders have fixed-rate mortgages, according to Mortgage Professionals Canada's semi-annual report on the housing market released in March 2022.
The 5-year fixed-rate mortgage is a popular loan term because it strikes the right balance between a competitive mortgage rate and a term length that gives borrowers confidence. Many borrowers in Canada want to avoid the hassle of renewing their mortgage while insulating themselves from short-term instability in the market (increasing interest rates by the Bank of Canada, for one).
Many risk-average borrowers lose sleep over the constantly changing market scenario and increasing interest rates, and locking a rate for a period of five years gives them peace of mind. With rising inflation and a possible recession in the first quarter of 2023, many borrowers are considering this mortgage type to remain stress-free for the next five years.
Some borrowers consider the 5-year fixed rate the Goldilocks of mortgage terms. It's neither too short nor too long, unlike a seven-year or 10-year mortgage term. Mortgages with terms longer than five years carry higher interest rates and onerous prepayment penalties. Interestingly, 37% of all renewals in 2019 consisted of homeowners switching to 5-year fixed-rate mortgages, according to the Bank of Canada. People tend to be less likely to renew into long-term fixed rates as they get more financially secure.
Fixed rates, in general, owe part of their growth in popularity to multi-year lows in bond yields. Falling bond yields lead to lower fixed mortgage rates.
| Year | Avg. 5-year Fixed Rates |
|---|---|
| 2009 | 4.05 |
| 2010 | 3.83 |
| 2011 | 3.63 |
| 2012 | 3.19 |
| 2013 | 3.15 |
| 2014 | 3.04 |
| 2015 | 2.61 |
| 2016 | 2.42 |
| 2017 | 2.63 |
| 2018 | 3.21 |
| 2019 | 2.75 |
| 2020 | 2.49 |
Over the long run, competitive 5-year fixed mortgages are priced about 1.50 percentage points above the 5-year bond yield. Hence, 5-year fixed rates more or less follow the movements of the 5-year Canadian bond yield, except when the financial system is stressed, as it was in 2020 and 2008.
As bond yields rise and fall based on investors' inflation expectations and other factors, so do fixed mortgage rates.
This correlation is due to mortgage lenders relying on the fixed-income market for mortgage funding. Market forces determine the interest rate they must pay on the money they are lending out to you at a higher rate. This difference between what they are paying and earning is referred to as a "spread."
A perfect example of the fixed/bond link was the historic fall in bond yields in early 2020. That drop coincided with mounting fears over the coronavirus and plunging oil prices, which led directly to steep discounting of fixed mortgage rates. That is until fears of credit defaults spiked risk premiums, and mortgage rates shot up temporarily.
In the present scenario, the Bank of Canada has raised overnight rates six times since March, which has caused ripples in bond markets in Canada. The 5-year bond yield has been on the rise since April this year, which indicates that the banks are going to increase their 5-year fixed rate mortgage at some point as well. The Bank of Canada's benchmark bond yields increased from 2.46% on April 1 to 3.41% on October 26 this year. The rise of the 5-year bond yield, which trades daily, will directly impact the 5-year fixed rates set by big banks to ensure that the banks' costs are covered during market fluctuations.
Due to higher policy interest rates and high inflation, the demand in the housing sector has seen a sharp decline from earlier this year and last year. People with existing fixed-rate mortgages only will see a change in their mortgage payments upon renewal, unlike those with variable rates will see their mortgage rate change with immediate effect.
| Date | 5-year benchmark bond yield | Average 5-year conventional mortgage rates | |
|---|---|---|---|
| 2012-12-05 | 1.26% | 5.24% | |
| 2013-12-18 | 1.82% | 5.34% | |
| 2014-12-31 | 1.34% | 4.79% | |
| 2015-12-30 | 0.74% | 4.64% | |
| 2016-12-28 | 1.16% | 4.64% | |
| 2017-12-27 | 1.82% | 4.99% | |
| 2018-12-19 | 1.9% | 5.34% | |
| 2019-12-18 | 1.7% | 5.19% | |
| 2020-12-30 | 0.41% | 4.79% | |
| 2021-12-29 | 1.3% | 4.79% | |
| 2022-01-05 | 1.42% | 4.79% | |
| 2022-04-20 | 2.74% | 4.99% | |
| 2022-05-25 | 2.6% | 5.39% | |
| 2022-06-15 | 3.38% | 5.64% | |
| 2022-06-22 | 3.31% | 6.04% | |
| 2022-07-27 | 2.83% | 6.14% | |
| 2022-10-19 | 3.71% | 6.49% | |
Sources:
https://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/
Bond prices and yields are always at risk of fluctuating value, especially when interest rates rise or fall. A bond's price and yield are also inversely related. As the price of a bond goes up, the yield decreases and vice versa. Understanding bond yields is key to understanding expected future economic activity and interest rates. That helps inform everything from stock selection to deciding when to refinance a mortgage. When interest rates are on the rise, bond yields generally go up as well. When interest rates are lower, bond yields tend to fall.
Banks use all kinds of sources to fund 5-year fixed mortgages, including:
A blended cost of funds is often derived from the above sources, forming the basis of 5-year fixed mortgage pricing. On top of that, lenders try to earn enough to pay staff, sales and marketing expenses, overhead and a small profit (which often amounts to less than ½ per cent of the mortgage principal, plus renewal and servicing revenue).
| Date (2012-2022) | Bank of Canada target overnight rate | Average 5 years conventional mortgage rates |
|---|---|---|
| 2012-12-05 | 1% | 5.24% |
| 2013-12-18 | 1% | 5.34% |
| 2014-12-31 | 1% | 4.79% |
| 2015-12-30 | 0.5% | 4.64% |
| 2016-12-28 | 0.5% | 4.64% |
| 2017-12-27 | 1% | 4.99% |
| 2018-12-19 | 1.75% | 5.34% |
| 2019-12-18 | 1.75% | 5.19% |
| 2020-12-30 | 0.25% | 4.79% |
| 2021-12-29 | 0.25% | 4.79% |
| 2022-01-04 | 0.25% | 4.79% |
| 2022-03-03 | 0.5% | 4.79% |
| 2022-04-14 | 1% | 4.79% |
| 2022-06-02 | 1.5% | 5.39% |
| 2022-07-14 | 2.5% | 6.04% |
| 2022-09-08 | 3.25% | 6.14% |
| 2022-10-27 | 3.75% | 6.49% |
The data shows the most typical interest rates offered by the six major chartered banks in Canada from 2012-2022. The posted rates cover prime rates, conventional mortgages, guaranteed investment certificates, personal, daily interest savings, and non-chequable savings deposits.
The prime rate, or prime lending rate, is the interest rate a financial institution uses as a base to determine interest rates for loan products. Each financial institution sets its own prime rate as a function of its cost of funding, which, in turn, is influenced by the target for the overnight rate set by the Bank of Canada.
As of Oct. 27th, 2022, the Bank of Canada's overnight rate stands at 3.75% and is subject to an increase in the coming months. The central bank aims to bring inflation down to its target of 2% (from the present 6.9%, as of September 2022) by 2024.
When shopping for a mortgage, it's crucial to compare terms, not just rates. That way, you ensure you’re getting the best value possible and a mortgage product that gives you the flexibility you require. Lack of flexibility can cost you.
There are always many things to consider before settling on a term. Despite a majority of Canadians gravitating to 5-year fixed mortgages, it’s possible that may not be the best mortgage for your situation.
Both fixed and variable rates come with pros and cons. Here are some that pertain to fixed rates…
The annual inflation rate in September inched down to 6.9% in September from 7% last month, which was still higher than the Bank of Canada's 3% target for 2023 and finally 2% by 2024 end. There is little doubt that the Bank of Canada will likely increase its prime rate by more than 50 basis points or even 75 basis points until the end of this year, which could take the overnight rate to 4.0% (from the current 3.25%).
The expectation of an interest rate hike ahead is reflected in the bond market, where the 2-year government of Canada bond yield rose to 4.18% immediately after the data- up about 10 basis points. The closely watched 5-year bond yield, which directly impacts the setting of fixed mortgage rates, hit a fresh 14-year high of 3.7% — up nearly 20 basis points.
Some business leaders anticipate that large increases in interest rates and high prices reducing consumption could likely cause a recession.
Economists, however, expect the Bank of Canada's prime rate to increase further as we usher into 2023, which will push mortgage rates higher. A Mortgage Professionals Canada report also expects CMHC's posted 5-year fixed conventional mortgage rate to rise through the next two years, reaching 4.3% by the end of 2022.
Quick statistical facts on Canada's favourite mortgage:
Before you lock in your mortgage rate for a period of 5-years, you must do some window shopping and identify which lender offers the best rate for you. RATESDOTCA helps you compare mortgage rates and identify lenders offering the best and cheapest rates for your mortgage.
Your mortgage is up for renewal at the end of a 5-year fixed-rate term.
Shopping around at renewal is fundamental to finding better deals and the best way forward is to compare rates. Homeowners should check RATESDOTCA to find the most competitive mortgage interest rates. Doing this could reduce your rate.
Yes, you can refinance your existing fixed-term mortgage rate, but it often results in a penalty.
Many homeowners wish to take advantage of falling interest rates in order to reduce expenses and build equity quicker. For instance, three years into a 5-year fixed-term mortgage, you notice interest rates have suddenly plunged. New homebuyers will be paying a much lower rate for the same term that you did. A lower interest rate helps pay off loan principal faster and ultimately reduces the length of your mortgage.
However, this refinancing decision could turn out to be an expensive one if you decide to break the original mortgage commitment and end up paying a penalty to your lender. Penalties range from as little as three months' interest to well into five figures. Your decision hinges on whether the savings from the lower rate outweighs the penalty and closing costs you'll incur. Penalties vary across institutions and depend on the mortgage type (fixed vs. variable), term length and your existing rate, among other things.
Tip: If you want to refinance your mortgage and take advantage of a lower rate, use a mortgage penalty calculator to get a rough idea of your prepayment charge. Note: Always verify the exact amount with your lender, as lenders' penalty formulas can differ.
A mortgage rate lock is an agreement between the lender and borrower that allows for locking the interest rate for a fixed period in the prevailing marketing situation. This allows protection for the borrower from rising or falling interest rates for a specified period. The lender is likely to charge a lock fee, or alternatively, the lender may charge a marginally higher interest rate, to begin with, just in case the borrower chooses not to lock the interest rate.
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