Up until October 2016 there was an advantage of choosing a 5 year fixed rate over some of the other terms. The advantage was that one could qualify at the discounted rate for a mortgage versus the Benchmark Rate set by the Bank of Canada. At the time that was a 2 percent difference and gave borrowers a lot more buying power. October 17th came and with new regulations that advantage went away unless the mortgage is conventional. So now all insured mortgages no matter what term are qualified at the Benchmark Rate.
Statistically 60% of borrowers break their 5 year mortgage term after 3 1/2 years and have to pay a penalty. When you have a fixed term the penalty is based on the interest rate differential which means the difference between the existing mortgage rate and rate for the remaining time left on the term. If you are with a bank that can be expensive as their penalties are sometimes as much as quadruple of straight mortgage lenders because they incorporate the discount they gave you for the discounted. But some of the products the banks have are really good and depending on what the borrower is looking for, the best fit. How can we avoid those penalties?
Well this is one of the reasons why I favor variable rates but there are a couple altogether:
1. The penalty on a variable rate mortgage is typically 3 months interest, no matter when you break it in the term, unless it is specialty product with restrictions. In that case that should be disclosed up front before making a final decision. But this is a huge difference.
2. Statistically people fare better with variable rates
3. Variable rates do NOT go up with fixed rates. Variable rates fluctuate with Prime going up or down which is set by Bank of Canada throughout the year in eight meetings. Fixed rates go up or down depending on bond rates.
4. With fixed rates recently having gone up, the variable rate is still lower. You can set your payment higher as if you had a fixed rate and apply the difference of the fluctuations to the principal.
If you have any questions feel free to contact me.