5-year fixed mortgage rates in Canada
WATCH: June 7, 2023 Bank of Canada Announcement
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5-year fixed rates vs. 5-year variable rates
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June 2023 mortgage market update
The Canadian mortgage market has been on a wild ride of late, in the wake of yet another rate hike from the Bank of Canada on June 7 and the ensuing spikes in the bond market. Here are some key points that anyone shopping for a mortgage today should know:
- Bond market update: Fixed mortgage rates are directly tied to bond yields, which have been extremely volatile throughout 2023 thus far. Bond yields have been see-sawing up and down with head-spinning frequency as markets and investors react to economic data suggesting the possibility of a recession or any action by the Bank of Canada. In the wake of the latest CPI data from May, which came in at 3.4% - a welcome month-over-month drop of 1% from April’s higher-than-anticipated reading of 4.4% - bond yields have dropped slightly. They are now hovering around the 3.6% range, down from above 3.7%. While this eases the upward pressure on fixed rates that we’ve been seeing over the past few weeks, it’s too early to tell whether bond yields will continue to descend in the longer term.
- CPI update: Inflation is closely watched by the Bank of Canada, as it constitutes the main metric that drives its monetary policy. The Bank uses its policy rate (also known as the benchmark rate or Overnight Lending Rate) to control inflation. When inflation is trending too high, as it has been since the end of pandemic lockdowns in 2021, the Bank hikes the policy rate in order to suppress consumer and borrowing activity and thus weaken the growth of inflation. Conversely, when the economy is slack, the Bank cuts the policy rate to encourage consumer spending and borrower activity. The most recent Canadian consumer price index reading in May came in at 3.4%, which is very good news after April’s unexpectedly high reading of 4.4%. It provides clear evidence that the Bank of Canada’s aggressive rate hiking strategy is yielding results, and puts into question whether the Bank will indeed effect another rate hike at its July 12 announcement, which was hitherto widely expected. However, some economists still believe that there will be one more 0.25% increase in the Overnight Lending Rate in July, bringing it to a full 5%.
- Real estate update: Despite an elevated rate environment, the Canadian real estate market has experienced continued and increasing growth in May. According to the latest figures for the month of May released by the Canadian Real Estate Association (CREA) on June 15, home sales are up by 1.4% year over year, and up by 5.1% from the previous month. CREA’s most recent data indicates that some 70% of markets across the country are enjoying a strong rebound in demand.
5-year fixed mortgage rates are the most popular type and term combination in Canada, so it’s usually the first place people start when researching mortgage rates. Ratehub.ca makes it easy to find the lowest 5-year fixed mortgage rates, as we bring rates from the big banks, lenders and credit unions all to one place at no cost to you.
June 7, 2023 Bank of Canada announcement update
On June 7, 2023, the Bank of Canada raised its target for the overnight rate by 0.25%, bringing it to 4.75%. This was the first rate hike since a conditional pause in March.
- Canadians with fixed-rate mortgages won’t be immediately affected by the Bank of Canada’s decision to hike the Overnight Lending Rate. However, the bond market has shot up past the 3.7% mark in response to today’s rate hike, and fixed-rate mortgage holders should expect higher rates when they renew at the end of their current mortgage terms.
- Five-year bond yields have been volatile in the last few weeks, and mostly on the rise. While multiple factors have contributed to this volatility, most recently, bond yields were trending upward in anticipation of a possible rate hike. With this latest rate announcement, we can expect them to climb even further and with them, fixed mortgage rates.
- The Bank provided detailed commentary wherein it reaffirmed its iron-clad commitment to wrestling inflation back down to its target of 2%. The Bank stated that it would be keeping a close eye on key economic indicators like the Consumer Price Index (CPI), and would not hesitate to effect another rate hike at its next announcement on July 12 if important metrics are not trending in a positive direction.
- This was the Bank of Canada’s ninth rate hike since March 2022; during that time frame, the target for the overnight rate has gone from 0.25% to 4.75%, an increase of 450 basis points.
Best 5-year fixed mortgage rates
5-year fixed mortgage rates: Quick facts
Nearly four out of five of all mortgage requests made on Ratehub.ca from January - April 2023 were for 5-year fixed mortgages
72% of Canadians had fixed mortgage rates in 2020 (Source: Mortgage Professionals Canada)
- Mortgage rate is fixed over a 5-year term
- 5-year mortgage rates are driven by 5-year government bond yields
What makes a 5-year fixed-rate mortgage right for me?
Generally, a fixed-rate mortgage is a good choice if you are risk-averse and don’t want to deal with the stress that could come with a variable rate if the prime rate goes up over time and your mortgage payment increases. Before committing to a 5-year mortgage, you need to think about your personal situation today and going forward. If you are likely to move, change jobs, or otherwise embark on any life changes that may affect your ability or desire to remain in the home you are purchasing, you need to take this into account when selecting the mortgage that’s right for you.
Full feature mortgages vs. restricted mortgages
While it’s always desirable to obtain the best mortgage rate, in today’s historically high rate environment, the quest to find the lowest rate seems more important than ever. It also means that one needs to be vigilant about choosing the right mortgage for your needs. The lowest rate that you see advertised may not be what you want, because it could well be for a restricted mortgage. Although the low rates of a restricted mortgage may catch your eye, it’s important to understand the drawbacks. A full feature mortgage will have a higher interest rate, but it will also have a number of features that make it very desirable, including:
- Pre-payment options: Take a look at what pre-payment options your lender is willing to offer you. The more flexible your lender is with pre-payment options, the faster you can potentially pay off your loan, which could save you thousands of dollars in interest fees. The main pre-payment options are monthly pre-payment and lump sum pre-payment. In the case of the former, you’re allowed to increase your monthly payment up to a certain percentage determined by your lender, maxing out at 100%. If you had a lender who was flexible enough to allow you to double your monthly payments, for example, you could in theory pay your mortgage off in half the time if you were able to do so. The latter option, lump sum pre-payment, allows you to pay off up to say, 25% of your mortgage loan, again, depending on your lender.
- Porting your mortgage: If you need to sell your home before the end of your mortgage term, many lenders will allow you to port your mortgage. Porting a mortgage means to take your current mortgage with its existing rates and terms and transfer it to another property, and allows you to avoid breaking your mortgage. You’ll want to talk to your lender about how portable your mortgage is, particularly if you think you may need to move before your term is up. Not all mortgages are portable, and many that are portable have conditions attached that you should be aware of.
- Lump sum pre-payment privileges: You are allowed to make multiple lump sum pre-payments to bring down your mortgage balance in a given calendar year. Most lenders will cap the amount of pre-payments you can make, e.g. you cannot pay more than 20% of your principal in a single year.
- Payment flexibility: If you choose to increase the size of your regular mortgage payments, you are able to do so without incurring any penalties or fees.
These are just some of the most common features you’ll find in a full feature mortgage that make them so convenient for homebuyers. To learn more about the mortgage that’s right for you, it’s always a good idea to speak with a mortgage broker. They can give you personalized, expert advice at no cost to you.
What are some of the pros and cons of a 5-year fixed mortgage?
There are pros and cons to choosing a 5-year fixed mortgage rate, and we’ll walk you through each below. Some of the pros of a 5-year fixed mortgage are:
- Risk protection: For buyers who are risk-averse; a fixed rate mortgage enables you to “set it and forget it” - your rate, and therefore mortgage payment, is locked in and will not fluctuate with changes in bond yields. This allows you to budget with greater accuracy and offers you stability for the duration of your term. Moreover, in recent years, Canadians enjoyed access to some of the best fixed rates available in decades, although fixed rates started to climb again in October of 2021. Since then, high inflation, global banking instability, an incredibly tight job market and other factors have all pushed bond yields up, and with them, fixed mortgage rates. Today’s fixed rates are now higher than they have been since back in 2009.
- Competitive rates: The 5-year term is historically the most popular option, and the one that lenders often encourage you to opt for. The length of this term is a good “middle of the road” choice for home buyers. Because it’s such a competitive, popular rate term, lenders often get the most aggressive when pricing these terms.
On the flip side, there are some cons to consider as well.
- Higher rates: In order to guarantee your fixed rate, your lender will charge you a premium. According to York University Professor Moshe Milevsky’s landmark 2001 study, historically, over 90% of Canadians who have maintained a variable mortgage rate throughout their entire mortgage term have paid less in interest than those who have stuck to a fixed rate.
- Breakage penalties: While the 5-year term can offer you peace of mind, in the event that something such as a move, loss of a job, illness or divorce forces you to break your mortgage, you could be on the hook for a hefty break penalty. With a fixed mortgage rate, your penalty will be the greater of the interest rate differential (IRD) or three months’ interest. Oftentimes, the IRD penalty can be large, and thus a fixed rate mortgage can be expensive to break. If you have a variable rate mortgage, on the other hand, the penalty will always be three months’ interest, and it can therefore be less costly to break your mortgage. For a more detailed explanation of IRD and how it is calculated, you can refer to our Mortgage Refinance Calculator page. You can also use our Mortgage Penalty Calculator to estimate how much you might have to pay in the event that you have to break your mortgage.
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Historical 5-year fixed mortgage rates
Looking over historical mortgage rates is the best way to understand which mortgage terms attract lower rates. They also make it easier to understand whether rates are currently higher or lower than they have been in the past.
Here are the lowest (high-ratio, insured) 5-year fixed rates of the year in Canada for the last several years, compared to several other types of mortgage rates.
Source: Ratehub Historical Rate Chart
The popularity of 5-year fixed mortgage rates
A 5-year mortgage term is the most popular duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average. It also tends to be heavily promoted by major lenders. A further breakdown of mortgage terms shows that about 80% of mortgages have terms of five years or less.
Fixed rates are by far the most common - in 2023, from January to April, 95% of mortgage rate inquiries made to Ratehub.ca were for fixed rates.
What drives changes in 5-year fixed mortgage rates?
By and large, 5-year fixed mortgage rates follow the pattern of 5-year Canada Bond Yields, plus a spread. Bond yields are driven by economic factors such as unemployment, export and inflation.
When Canada Bond Yields rise, sourcing capital to fund mortgages becomes more costly for mortgage lenders and their profit is reduced unless they raise mortgage rates. The reverse is true when market conditions are good.
In terms of the spread between the mortgage rates and the bond yields, mortgage lenders set this based on their desired market share, competition, marketing strategy and general credit market conditions.
References and Notes
- Trends in the Canadian Mortgage Market: Before and During COVID-19, Statistics Canada, 2021
- Annual State of the Residential Housing Market in Canada, Mortgage Professionals Canada, 2021
- Housing Market Report: 2022 Year-End Consumer Survey and Outlook, Mortgage Professionals Canada, 2023