By Sandra MacGregor on February 28, 2022

The best five-year fixed mortgage rates in Canada 2022

By Sandra MacGregor on February 28, 2022

With so many options, finding the best mortgage rate can be a challenge for homebuyers. Here’s what you should consider.

Mortgage rate comparison

After consecutive years of record-low interest rates in Canada, many experts predict we are entering a period of rising rates—which would make the cost of borrowing money, be it for a mortgage or a student loan, more expensive. The possibility of these rate hikes can make the stability of a five-year fixed mortgage rate seem like a good option compared to one with a variable rate—especially for first-time homebuyers or those about renew their existing mortgage. In fact, five-year fixed-rate mortgages are the most popular mortgage product in Canada. However, as with any financial product, they still have their drawbacks.

Here’s how five-year fixed mortgage rates work and how to know if they are the right fit for your finances. And before speaking to a lender or mortgage broker, learn more about how they compare to five-year variable mortgage rates.

What is a five-year fixed mortgage rate?

As the 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 range from six months to 10 years, with five years being the most common agreement.

With a fixed-rate mortgage, your mortgage interest rate is locked in for that period of five years. During your term, your lender can’t raise the interest rate, which 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 in the Bank of Canada’s overnight rate.

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, borrowers are penalized for paying off a closed mortgage early. As a rule of thumb, closed-term mortgages come with lower interest rates because they offer less flexibility than open mortgages.

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, though 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.

However, when Canadian inflation rates exceed the norm, hikes in the Bank of Canada’s overnight rate—which lead to higher variable interest rates—are often not far behind. At times like these, locking in a fixed mortgage rate could be a smart option for borrowers who want to avoid the fluctuations that come with variable-rate mortgages.

The pros and cons of five-year fixed rate mortgages

Pros to consider:

Competitive rates: As the most common mortgage product, lenders compete for your business by generally trying to offer good rates.
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 to consider:

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. That’s because, as the borrower, you pay a premium for the predictability of a fixed-rate mortgage. In some instances, you could end up paying significantly more than you would with a variable rate, if market interest rates fall during your term.

Is a fixed-rate mortgage better?

Kim Gibbons, a mortgage broker with Mortgage Intelligence in Toronto, notes that both fixed and variable rates have their benefits and downsides, so it’s crucial for people 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 that 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 should 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 shop around to see if you can find a better offer from a new lender.

No matter which lender you decide to go with, 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.