Mortgage Term Review

Best-Mortgage-terms Here’s our latest mortgage term review, updated to reflect market-moving events of the past three months.

  1. Is it true that we do not have long term mortgages in Canada because by law you are allowed out of your mortgage after 5 years?

  2. Hi Austin,
    Thanks for the question. The definition of “long-term” is largely relative to the country. In the U.S., for example, long-term mortgages include 15 to 30 year terms. In the U.K., long-term mortgages are 40 years or longer. In Canada, “long-term” usually refers to 5-10 year terms.
    Unless a mortgage is fully closed, borrowers are generally allowed out of Canadian mortgages at any time, albeit with a penalty in most cases (unless the mortgage is open).

  3. Rob,
    This is a top-notch piece of work. What a helpful resource.
    I had one question I was wondering if you could help with. How low do you think a 2-year fixed rate would have to be to compete with that 3-year deal?
    Mike McCloud

  4. Hi Mike,
    Thanks for the nice feedback. Sorry for the slight delay in replying.
    There are several ways to look at this so it’s tough to provide a definitive answer. Nonetheless, as a ballpark, let’s say you were to renew into a prime – 0.70% variable at maturity of both the 2-year fixed and 3-year fixed.
    In that scenario, given economists’ current rate hike forecasts, the 2-year fixed would need to be about 2.24% to be equivalent to a 2.90% 3-year variable.
    This comparison measures the total hypothetical cost of each option over 36 months. It assumes the 2-year mortgagor would renew into a 4.30% variable in year three, which implies a 5% prime rate in October 2012.
    Of course, you could also assume the 2-year mortgagor renews into a 1-year fixed in year three. Based on economists’ long-term yield forecasts, one could estimate a 3.85% 1-year fixed rate in October 2012. In that case, the 2-year rate would need to be about 2.45% to be equivalent to a 2.90% 3-year fixed.
    Keep in mind, rate forecasts have large margins of error so these numbers are purely theoretical.

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