There are a few things we Canadians will not do without like our hockey, maple syrup, and a 5 year fixed mortgage? That’s right. Believe it or not, this mortgage product is as Canadian as they come. There is no doubt as 4 out of 5 new mortgages in 2012 were fixed rate and the most popular term is the 5 year. But why do we choose the 5 year fixed mortgage? Here are five great reasons why.
1. Five Year Fixed Mortgage Most Popular
As mentioned earlier, the five year fixed mortgage is the most popular mortgage product in the Canadian market today. This from CAAMP’s annual state of the Residential Mortgage market in Canada report. In fact, it was not just new mortgages that held this product as most popular but even 2 out of every 3 renewal or refinance in Canada chose the same mortgage product. This is the lion’s share and there must be more reasons why this was so.
2. It Carries Less Perceived Risk
It is said that studies show that humans feel twice as strongly about avoiding a potential loss than taking a risk for a potential gain. This is obvious in mortgages as well. Although the variable rate mortgage has been less competitive than in the past few years, there are still discounts available that make the savings over a five year period worth while. But it comes with a risk. As the interest rate on your mortgage is tied to the Bank of Canada’s overnight lending rate – there is always the chance that interest rates will rise and you will be servicing the same debt with more after tax dollars. The five year fixed mortgage locks in today’s historical low interest rates and provides peace of mind.
3. It Is The Easiest To Qualify For
Mortgages have changed significantly in the last two years. One of the areas where it has become quite apparent is where the Bank of Canada has imposed it’s qualifying rate of today at 5.24% on all fixed rate mortgages with any term less than 5 years. This means to qualify to service the mortgage on a 350K mortgage with a 3 year term at 2.79% for example – you would have to earn 93K gross family income versus the actual 75K that it takes to service this mortgage payment at the 2.79%. So I guess it may be time to send your first born out to Tim Horton’s to earn the extra 18K so the bank will provide you the mortgage loan. Although this seems silly – it is our current reality and makes the 5 year fixed mortgage the only choice for some mortgage holders.
4. Five Year Fixed Mortgage Has The Most Competition
A lot of the factors already mentioned play into this one. The fact that variable rate mortgages have had lesser discounts of late as well as the changes to the government’s qualification rules have lent themselves to increased competition for the five year fixed mortgage. This has benefited the consumer greatly in that this is a mortgage product that is most often discounted by lenders to attract new clients and most aggressively. Almost daily there is another lender who has a promotional or quick close offer where this mortgage product is pushed ahead of all others to meet the demand of the consumer.
5. It Has The Best Overall Interest Rate
Although it can be argued that a 3 year mortgage at 2.79% beats a five year at 2.99% – we have to consider that as no one holds the crystal ball on the future – even a minor rise in interest rates can make the 3 year mortgage a losing proposition. Say for example the last two years of the initial five, interest rates where to rise to even 3.49% regardless of the future term. This means your effective rate for the five year term will be 3.07% versus the original 2.99% five year fixed mortgage available today.
Even though we have weathered some rough financial waters over the past few years and a good degree of uncertainty in the future – some things here in Canada stay the same. As reliable as a Tim Horton’s Coffee or Sunday morning breakfast with sweet maple syrup – we love our 5 year fixed mortgages. And with good reason – less risk, simpler qualifications, more competition, and the best interest rates make this a stand out in the vast array of mortgage options available to the consumer today. If you are in the market to purchase a home or are considering your options on the renewal of your mortgage contract – give me a hollar below to see how we can get you the best mortgage for your family.