The best 5-year fixed mortgage rates in Canada 2023 – MoneySense

Mortgage rates have been on a whirlwind ride over the past year. In March 2022, mortgage rates started climbing rapidly, and they remain high in early 2023. However, given that inflation is showing signs of cooling, many experts predict rates to stay the course and, eventually, go down—if not this year, then in 2024. So if you’re searching for a mortgage, particularly a five-year fixed or five-year variable-rate mortgage, now’s a good time to reassess your options. Here, you’ll find everything you need to know about fixed-rate mortgages with a term of five years, including how to use the tool above.

What is a five-year fixed mortgage rate? 

As its name implies, a five-year fixed-rate mortgage comes with a mortgage term of five years—that’s the duration for which your mortgage contract remains in effect. In Canada, mortgage terms can range from six months to 10 years, with five years being the most common. 

With a fixed-rate mortgage, your mortgage interest rate is locked in for the period of the contract. This means you can predict what your mortgage payments will be until your mortgage contract comes to an end and it’s time to renew. 

For this reason, fixed-rate mortgages can provide a greater sense of security than variable-rate mortgages. With a variable-rate mortgage, the interest rate can fluctuate throughout the term. This flux occurs as lenders adjust their prime rates in response to changes to the Bank of Canada’s (BoC) overnight rate. The prime rate is currently at 6.7%.

Finally, fixed-rate mortgages can be open or closed. Whereas an open mortgage comes with the option of making additional regular or lump-sum mortgage payments without penalty, these actions are financially penalized with a closed mortgage. As a rule of thumb, closed-term mortgages come with lower interest rates because they offer less flexibility than open mortgages.

What happened to fixed mortgage rates in 2022? 

At the start of 2022, the best five-year fixed rate for a high-ratio mortgage (when mortgage loan represents more than 80% the property’s value) was 2.34%, according to data from rate comparison site Ratehub.ca. (Both MoneySense.ca and Ratehub.ca are owned by Ratehub Inc.). By January 1, 2023, the best available rate had climbed to 4.54% for the same type of mortgage. 

This increase was largely due to rising bond yields, as the BoC adjusted its monetary policy to address concerns about inflation. Typically, the BoC raises rates when inflation exceeds its 2% target, and it lowers them (or keep them stable) once inflation is tamed or the threat of a recession looms.

Towards the end of 2022, variable rates continued to rise while fixed mortgage rates started to decline. Variable rates are now higher than fixed rates.

Where will fixed mortgage rates go in 2023?

Great question! Despite the recent cooling of the housing market, borrowing costs for mortgages remain high for many Canadians. The BoC is not expected to cut interest rates until late in 2023 or 2024, meaning mortgage affordability is unlikely to improve in the short term.

However, some experts are convinced it will take even longer for rates to go down. 

“There is considerable noise suggesting that rates will be coming down at some point in 2023, and I believe this is simply a fallacy,” says Vince Gaetano, principal broker and owner of OwlMortgage.ca. “Rates will be flat, and Canadians will need to get used to interest rates at these levels and adjust their household budgets to reflect the higher cost of borrowing. The mortgage stress test, which was vilified for years will be the unsung hero for homeowners in the coming year or two.”

Should you switch from a variable- to a fixed-rate mortgage? 

If interest rates do start to go down, a variable-rate mortgage could once again become attractive to some buyers, allowing mortgage holders to take advantage of downward sliding rates. But what if rates simply stay flat, or even rise again?

Opting for a fixed interest rate is advantageous when prevailing interest rates are stable, and you wish to lock in a rate while avoiding the possibility of future increases. In addition, it offers the benefit of consistent and predictable payments, thereby helping you evade any unforeseen fluctuations in the market. 

“Any chance to lock into a 3-year fixed term or shorter should be strongly considered,” says Gaetano. “The Bank of Canada has signalled a pause in interest rates for now and this terminal rate will sit at the current level for a very long duration with potential of additional increases if necessary. Many variable rate holders need to understand that rates are not coming down any time soon and to brace themselves for a period of high rates for a while.”

The tool at the top of this article provides a glance at the best mortgage rates offered by a swath of Canadian lenders. If you are shopping for a mortgage on a new home purchase, input the purchase price and your down payment amount to view the best mortgage rates available. You can further narrow your search by adding other filters, such as rate type, rate term, amortization, occupancy status, mortgage payment frequency and location of the property. Finally, the tool can also be used by existing mortgage holders to view the best rates for the following:

Mortgage renewal: If your mortgage term is soon ending and you have an outstanding mortgage balance, you will have to renew your contract for another term. You can do this with either your existing lender—but it’s always good to shop around for another one with a better rate. 

Mortgage refinance: If you want to break your current mortgage contract and negotiate a new contract, that’s called refinancing. You may want to do this to take advantage of lower interest rates or access equity in your home. However, the decision to refinance should not be taken lightly, because you could end up paying significant penalty fees. 

Home equity line of credit (HELOC): This is a revolving line of credit, for a pre-approved amount of money, that allows you to borrow from the equity in your home. The interest rates on HELOCs are usually lower than those for traditional lines of credit, but higher than those typically offered for variable-rate mortgages. The money borrowed through a HELOC is repaid, with interest, in addition to your regular mortgage payments.

How are five-year fixed mortgage rates determined in Canada? 

Rates for five-year fixed mortgages are strongly linked to the price of five-year government bonds. Banks rely on bonds to generate stable profits and offset potential losses from the money they lend as mortgages. When banks expect their bond profits to increase, they lower their fixed-mortgage rates, and vice versa.

Historically, fixed rates have tended to hover above variable rates; however there are a few instances when variable rates have surpassed fixed rates. This historical trend suggests buyers may end up paying more for fixed mortgages, especially during periods of falling interest rates. 

In the last months of 2022 and continuing into early 2023, fixed rates started trending downward due to bond yields levelling out. If a recession is looming, bond yields could decrease, meaning that fixed mortgage rates will follow suit. Meanwhile, variable rates have risen above fixed rates in conjunction with banks raising their prime rates.

The pros and cons of five-year fixed rate mortgages

Pros: 

• Competitive rates: Lenders know you are shopping around and they will generally offer comparable and lower rates for your business. 
• Predictability: You know your interest rate, and therefore your mortgage payments, will not change for the duration of the term. That stability can help you budget more easily.  
• Potential to save money: If interest rates increase during your term, you could end up paying less than you would with a variable rate. 

Cons: 

• Stiffer penalties: The penalty to get out of a fixed mortgage contract can be quite a bit higher than with a variable mortgage. You may also be more limited in your ability to pay off your mortgage faster through additional payments.
• Potential to pay more in interest: Historically, fixed rates have been priced higher than variable rates, with a few exceptions. In some instances, you could end up paying significantly more in interest than you would with a variable rate, if market interest rates fall during your term. 
• Higher cost: You will pay for predictability and peace of mind. When comparing fixed to variable rates, you will see that fixed can be slightly higher.

Is a fixed-rate mortgage better? 

Kim Gibbons, a mortgage broker with Mortgage Intelligence in Toronto, say both fixed and variable rates each have their benefits and their downsides, so it’s crucial for buyers to consider whether they value stability over potential savings.

“When my clients are trying to determine whether to go with a variable or a fixed rate, I tell them they need to really look at their risk tolerance and whether or not they have enough income or savings to provide a buffer to handle a sudden increase in rates,” she says. “If they are going to lose sleep at night worried that interest rates are going to go up and they have a limited budget that they can’t go beyond, then a fixed rate is likely a better move. If, however, they have good incomes and a lot of savings put aside then they can better handle fluctuating rates.”

“It really depends on each person’s circumstances,” adds Gibbons. “There’s no single solution that’s right for everyone.” 

What happens when my mortgage term ends? 

When your mortgage term ends, your mortgage contract will be up for renewal. A few months before it ends, your lender will send you a renewal statement that will include details on the remaining balance on your mortgage, your new interest rate at renewal, your payment schedule and any fees that may apply. At this time, you can choose to renew your mortgage with your original lender or comparison shop for a better rate from another lender. 

No matter which lender you decide on, it’s always worth reviewing what five-year fixed mortgage rates are currently being offered in Canada before deciding to renew or switch products or lenders. 

Should you choose a five-year fixed mortgage rate?  

When deciding if a fixed-rate mortgage is right for you, there are a number of key factors to consider, including the historical performance of five-year fixed mortgage rates. Depending on what happens with market interest rates during your term, you may pay extra, but those additional costs could save you from the stress of predicting ups and downs in the economy and interest rates.

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