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Fixed rate mortgages
Fixed rate mortgages offer stable monthly payments and fixed interest rates so that you can stick to your budget.
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What's in this guide?
- Compare mortgage lenders in Canada
- What is a fixed-rate mortgage?
- How is fixed-rate interest calculated?
- Popularity of five year fixed mortgage rates
- Pros and cons of a fixed rate mortgage
- Who is a fixed-rate mortgage best suited to?
- How do loan terms influence your monthly payments?
- How does amortization influence your monthly payments?
- Bottom line
- Frequently asked questions
What is a fixed-rate mortgage?
A fixed rate mortgage is a type of home loan that offers stable monthly payments and fixed interest rates. Unlike variable rate mortgages, which have interest rates that fluctuate in line with market conditions, your payments with a fixed rate mortgage should never increase or decrease unexpectedly. The only exception to this rule is if your insurance or property taxes change (and are baked into your monthly mortgage payments).
Loan terms for fixed rate mortgages generally last from 6 months to 10 years, with 5 year fixed mortgage rates being the most popular option for Canadians. Amortization periods can last anywhere from 5 to 35 years, depending on the size of your loan and how quickly you want to pay it off. Just be aware that most fixed rate mortgages require a down payment between 5% and 20% to qualify, so you might need to save up a significant amount to get approved.
Amortization periods vs loan terms
Loan terms represent how long you commit to doing business with a particular lender while amortization periods represent how long in total it will take you to repay your loan in full. The length of your loan term and amortization period can have a significant impact on how big your monthly payments are and how much you pay in interest over time.
- Choosing an amortization period. The longer your amortization period is, the less you’ll pay every month for your mortgage and the more interest you’ll pay over time. The opposite is true for shorter amortization periods, which come with higher monthly payments and less interest paid over time.
- Choosing a loan term. The most popular loan term in Canada is five years, but you can choose to go longer or shorter depending on your preferences. Just be aware that you’ll typically pay higher interest rates with loans that are longer.
How is fixed-rate interest calculated?
Banks and mortgage lenders will take the prime rate into consideration when setting fixed mortgage rates. They may also look at competing lenders rates along with economic variables such as inflation and stock market performance to determine where their interest rates should sit. This is typically the rate they’ll advertise for fixed rate mortgages when marketing to clients.
However, you aren’t always guaranteed to get the marketed rate when you apply. That’s because your lender will also need to factor in how likely you are to repay your loan to determine what rates you get. This will usually involve making decisions based on your credit history, debt-to-income ratio, monthly income and other factors.
Popularity of five year fixed mortgage rates
Most Canadians choose to sign up for five year fixed mortgage rates to minimize risk. This is because these rates are often the lowest on offer with many providers. They also sit at a middle ground between the minimum and maximum term length that you can have. This means they’re long enough to provide some stability but short enough that you can reassess your rates at regular intervals.
Your best bet is to compare the five year fixed mortgage rates to other loan terms on offer from the same provider. You should also compare five year fixed mortgage rates across providers to make sure that you get the best deal. You can start by making a table similar to the one below to track the rates on offer and see which one is the best deal for you.
Compare mortgage rates
As you can see in the table below, five year fixed mortgage rates are usually the lowest. This is because many providers market “special offers” for five year fixed mortgage rates to get customers to buy into this term length.
|Provider||TD Bank||RBC||CIBC||Tangerine||Simplii Financial|
|1 year term||2.79%||2.69%||2.79%||2.79%||N/A|
|3 year term||2.14%||3.45%||3.49%||1.45%||1.99%|
|5 year term||1.94%||2.1%||2.14%||1.74%|
|7 year term||5.35%||5.4%||2.53%||2.64%||N/A|
|10 year term||5.6%||5.8%||6.19%||3.09%||N/A|
|*Sample rates collected on 19 January 2021|
Pros and cons of a fixed rate mortgage
- Consistent payments. Since the interest rate doesn’t change throughout the loan term, your monthly payments will be the same, which can help with cash flow, budgeting and lifestyle management.
- Easy to compare. Fixed rate mortgages are generally easier to compare than variable rates as the math is more straightforward and you don’t have to consider the complex factors associated with variable rates.
- Protected from rate rises. If you have a fixed rate mortgage for a long term and rates increase after a couple of years, then you won’t be at risk of defaulting on your loan due to higher monthly payments. (Conversely, you can refinance if rates fall in some cases.)
- Protected from inflation. Regardless of changes to inflation in the market, your interest rate will remain stable throughout your loan term.
- Market risk. You won’t automatically benefit if interest rates drop, even though you may be able to refinance to take advantage of lower interest rates.
- Your term will expire. Loan terms on mortgages typically sit between 6 months to 10 years. Once your term reaches maturity, you’ll need to accept a new interest rate from your current lender – or try to score a better deal with a new lender.
- Higher rates. Fixed rate mortgages typically come with higher average introductory interest rates compared to those offered during the initial period for variable rate mortgages.
Who is a fixed-rate mortgage best suited to?
Fixed rate mortgages may be a good fit for you in the following situations:
- You have good credit. You’ll usually need to have a credit score of at least 650 to qualify for a fixed rate mortgage.
- You want regular monthly payments. You may want to consider a fixed rate mortgage if you want your payments to be the same every month.
- You need to budget. You can easily budget with fixed rate mortgages since they come with consistent monthly payments.
- Current interest rates are low. If current interest rates are low, it may be a good time to lock in your interest rates with a fixed rate mortgage.
- Compare rates from 30+ lenders
- Safe and simple application
- Referral bonus available
Apply today and compare rates from 30+ banks and lenders, with rates ranging from 2.54% - 4.99%.
- APR range: 2.54% - 4.99%
- Lender type: Broker
- Loans offered: First & Second Mortgages, HELOC, Bridge
- Fees: Service is free for prime mortgages
- Min. credit score: 600
How do loan terms influence your monthly payments?
You can typically lock in a fixed interest rate for a loan term of 6 months to 10 years. You may want to lock in a shorter term if you think that mortgages rates will drop in the next little while. If rates are already low, it could make sense to take out a mid-range term (with five year fixed mortgage rates being the most popular).
|Term length||Total Interest||Monthly payments||Equity|
|Short term (1-5 years)||Lower interest||Tied to amortization||Tied to amortization|
|Long term (6-10 years)||Higher interest||Tied to amortization||Tied to amortization|
Keep in mind that your overall monthly payments will be tied to your amortization rate. For example, you’ll have much higher monthly interest payments if you’re paying your loan off in 15 years than if you were paying it off in 30 (no matter what interest rates you get). That said, securing a lower interest rate can help lower your payments a little bit.
How does amortization influence your monthly payments?
With a shorter amortization period, your monthly payments will be much higher but you’ll pay your mortgage off faster (with more money going towards principal). You’ll also build up equity in your home much faster.
Longer amortization periods come with lower payments, but you’ll spend more on interest over time and it will take longer to pay off your home.
|Amortization period||Total Interest||Monthly payments||Equity|
|Short amortization (5-20 years)||Lower interest||Higher payments||More equity|
|Long amortization (21-35 years)||Higher interest||Lower payments||Less equity|
Choosing the right amortization period for your mortgage is crucial to paying your mortgage off in a timely manner, with the lowest interest rates and most manageable monthly payments possible. The most common amortization period in Canada is a 25 year amortization period (split up into 5 different fixed mortgage terms, with each term being 5 years long).
You may want to choose a shorter amortization period in the following situations:
- You don’t have a big mortgage to begin with.
- You can’t make a down payment of 20%.
- You plan to retire within 20 years or less.
- You want to own your home quickly.
- You want to pay less interest.
- You have a substantial income or low monthly expenses.
You may want to choose a mid-range amortization period in the following situations:
- You plan to retire within 30 years or less.
- You can’t make a down payment of 20%.
- You want to own your home relatively quickly.
- You would like to have lower monthly payments to free up your cash flow.
You might like to choose a longer amortization period in the following situations:
- You’ve put a down payment of at least 20% on your house.
- You think you might have an unpredictable income or unstable job.
- You want low monthly payments and don’t mind paying more in interest over the life of your mortgage.
- You’re young and you don’t plan to retire within the next 30 to 35 years.
Fixed rate mortgages can be a good option if you want predictable monthly payments for the lifetime of your home loan. Just be aware that the loan term and amortization period you choose can greatly influence your monthly payments and how much interest you pay over the course of your loan. Find out more about how fixed mortgages work and compare lenders today to find the best rates.
Frequently asked questions
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