Mortgage shoppers will often ask, “What is a fair rate…?” The following table sets out to answer that question. It’s a compilation of available deeply-discount mortgage rates, as sampled from lender websites, internal broker rate sheets, various rate aggregation websites, mortgage specialist and broker websites.
Barring posted and “special offer” rates (which aren’t so special), you’ll be doing very well for yourself if you can find rates in these ranges. See exceptions below.
5-yr fixed (bank posted)
5-yr fixed (bank “special offer”)
5-yr fixed (quick close)
5-yr fixed (no frills)
Exceptions: Only nationally-available rates are quoted here. There may be better rates on a regional basis. These figures apply to well-qualified borrowers with provable income and strong credit. Rates may be higher or slightly lower depending on your circumstances. Broker and bank “discretionary” rates vary widely by branch and/or mortgage advisor. Rates are as of today and subject too change. Always contact a mortgage professional for a quote specific to your circumstances.
Why is the “Term” important?
As the saying goes, “The lowest rate will save you hundreds, but the wrong term can cost you thousands.”
Put another way, the mortgage term you choose can have a far greater impact on borrowing cost than your up-front interest rate. That’s because your term determines the length of time you’re locked into a rate. That, in turn, affects how long you’ll overpay or underpay, relative to the other available options.
The wrong term can get mighty expensive if interest rates deviate from your assumptions, or if you need to break your mortgage early. It therefore pays to make the right choice from the get-go.
Almost anyone can find a low rate by doing a little Googling. Picking the right term is not as easy. Take some time, get good advice, and nail the right term the first time. Below you’ll find bite-sized term reviews to give you a running start.
Popular Fixed Terms…
Here’s a breakdown of the most common mortgage terms:
1-year Fixed: If you side with economists’ latest mortgage rate forecast, a deeply-discounted 1-year fixed (like Scotia’s) will put you neck and neck with a variable rate for the lowest hypothetical interest cost over five years. This assumes you renew into a new 1-year fixed or variable at maturity.
2-year Fixed: In terms of hypothetical cost savings, two-year terms aren’t far behind 1-years and variables in our rate simulations. Plus, they provide two years of rate certainty instead of one or none. As with any shorter term, make payment like a 5-year fixed to maximize your interest savings.
3-year Fixed: Three-year terms are a compromise between the risk of a variable or 1-year and the certainty of a 5-year fixed. If you’re torn between terms, the 3-year is a reasonable option. It’s even cheaper than a 50/50 five-year fixed/variable hybrid (…unless you live in BC where brokers and credit unions offer insanely-low hybrid pricing).
4-year Fixed: We used to call 4-year terms “ugly babies.” Times and rates change. They’re now a mathematically preferable alternative to 5-year terms, especially if you plan to break your mortgage before five years. (Most people refinance roughly every 3.5 years on average.) If you’re looking for a deal, various brokers are offering discounted ING rates on 4-year terms.
5-year Fixed: The venerable 5-year fixed still wins popularity contests, especially since high-ratio qualifying rates leave many with no other choice. Given today’s rates and forecasts, however, 5-year fixed terms have lost their mojo. If you can afford to, take some risk and move down the term ladder 1-2 years, or consider a hybrid that gives you some variable-rate benefit.
Longer Fixed Terms…
7-year Fixed: The spread between 5- and 7-year terms is about 70-80 basis points. There’s little logic to paying that premium annually just to have two more years of rate assurance. If you’re that concerned about risk, take a 10-year term for 20 basis points more, and get three more years of rate protection.
10-year Fixed: The decade mortgage is still available under 5%, and despite a narrowing spread between the 5-year, it’s still a poor gamble for most. That said, 10-year mortgages do have one positive: you can escape after five years with just a 3-month interest penalty. That gives you the option of switching to a potentially cheaper term after 60 months. On the other hand, history has shown that 10-year fixed terms cost more than consecutive 5-year fixed terms 9 out of 10 times (See: 10-year vs. 5-year fixed). For a 10-year fixed to prevail, 5-year fixed rates would need to climb 2 ⅓ percentage points by the end of the first 5-year term. If you think that’s possible, then ask yourself if you’re willing to pay $4,300 per $100k of mortgage for this “insurance.” That’s roughly the premium you’ll pay for a 10-year in the first five years.
5-year Closed Variable: At prime – 0.80% or better, going variable is a decent bet for those who can afford the risk of 30-40% higher interest payments. Research has shown that discounted variables have the edge over discounted 5-year fixed rates 77% of the time. (See: Fixed vs Variable Mortgage) The question is, with rates near all-time lows, how applicable is that research today? If you go variable, be smart about it. Base your payments on a 5-year fixed rate, or use the monthly payment difference for savings or to pay off high-interest debt.
3-year Closed Variable: 3-year terms let you renegotiate sooner—which helps if you foresee breaking your mortgage in three years. Otherwise, if you’re comparing a 3- and 5-year variable, take whichever offers the lowest rate and/or best flexibility. Incidentally, Industrial Alliance (IA) has a prime – 0.95% no-frills variable, but it’s fully closed for three years (barring sale) and has a few other restrictions. (Brokers without IA access can route via Nexsys.)
1-year Variable: With 1-year fixed rates being cheaper, 1-year variables are superfluous.
5-year Capped Variable: Someday, lenders might decide to set a fair cap rate (i.e. rate maximum). Until then, these products are just gimmicks.
5-year Open Variable: Open mortgages are temporary solutions and you’ll pay a premium for their flexibility. If you’re considering an open, remember that closed variables are portable and have just a 3-month interest penalty. Even if you break a closed variable in 180 days and pay the penalty, it’s still cheaper than taking an open…at today’s rates anyway.
Other Terms and Features…
5-year Cash Back Down Payment: Most people considering these mortgages are pretty desperate to buy, so banks apply strict underwriting and posted 5-year fixed rates. Here’s a radical thought for those without 5% down: Rent and save! Bank away a down payment, closing costs and a 4-6 month emergency fund. Home ownership without a financial cushion is like a tightrope walk without a net.
5-year Cash Back Refinance: Despite their posted rates, the actual effective rates on cash-back refis are not as bad as one might think. (See: Cash Back Refinances Live…) Thanks to the new mortgage rules, cash-backs are also one of the few options left for “A” borrowers needing a 90% loan-to-value refinance. If you require the maximum possible LTV, National Bank’s 5.5% cashback mortgage or FirstLine’s discounted “LoanCloser” lead the pack.
5-year No-Frills: At present, the piddly savings on no-frills mortgages isn’t worth the flexibility you give up. You’ll often lose standard pre-payment privileges and the ability to switch or refinance elsewhere mid-term. In addition, you’ll sometimes:
pay “reinvestment” fees if you break early
be without online account access (if that’s important to you)
pay higher breakage penalties.
All of this to save $13 a month on a $250,000 mortgage? No thanks.
Readvanceables: If you’ve got 20%+ equity, take a good look at a readvanceable mortgage. Readvanceables make you liquid, and you can’t put a price on liquidity—especially when emergencies and investment opportunities arise. The main downside? Choosing a readvanceable means you can’t switch lenders without paying legal fees.
Open HELOC:HELOCs are priced more than a point above closed variables. Therefore, don’t borrow from a HELOC unless you plan to pay it off quickly, need interest-only payments, or want to utilize interest offsetting. If you’re planning to borrow a large amount and pay off less than 25% of your mortgage each year, save money and take a readvanceable closed variable or 1-year fixed instead. Note: A few lenders are still trying to squeeze prime + 1.00% out of people on HELOCs. Don’t bite. There are too many good prime + 0.50% options out there.
Hybrids: A hybrid mortgage is part fixed and part variable, and/or part long term and part short term. Hybrids give you rate diversification, which makes a degree of sense since no one knows how high rates will be in five years. It’s best to choose hybrids that contain the same terms (e.g. a 5-year variable and a 5-year fixed). If you instead get part short-term and part long-term, the lender may be less motivated to give you a great rate when the short-term portion matures (because the lender knows you’re locked in with them on the longer-term portion). If you’re considering a hybrid, also look at a medium term like Merix’s 3-year fixed/variable. If you in the greater Vancouver area, talk to a broker who deals with Coast Capital. Its “You’re the Boss” mortgage is the most flexible and lowest-cost hybrid in the business.
The Disclaimer: There are a million and one exceptions to everything above and market conditions change almost daily. Therefore, be wise and have a mortgage professional compare these options based on current rates and your personal circumstances.
Above all, remember that these opinions are just that. They are not recommendations or advice. Qualifying is always contingent upon approved credit. All information is based on present market expectations, the market rates identified above, and current economist forecasts (we do not predict rates ourselves)—each of which may change drastically without notice. These opinions are intended for mortgages on owner-occupied properties only.
Rob McLister, CMT
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