5 Year Fixed Mortgage Rates Ontario: Full Comparison and Review

This page reviews the best 5 year fixed mortgage rates Ontario based on insured, conventional insurable, and conventional uninsured status. In the article below, we run simulations comparing the 5 year fixed to shorter term fixed mortgage rates, and the variable mortgage rate, to see how and when the 5-year fixed term could lead to greater mortgage interest savings.

Current 5 Year Fixed Mortgage Rates in Ontario

Brief Overview of 5 Year Fixed Rates

• According to our rate simulations (seen below) 5 year fixed mortgage rates could save you more if mortgage rates remain above 5.5% for the next 4 years.
• Based on conservative economic projections, our simulations (seen below) show that a 2 or 3 year fixed mortgage rate could save on mortgage interest costs Vs. the best 5 year fixed mortgage rates.
• In the short term there is more potential for savings with a 1 or variable rate, but also added risk that rates stay higher for longer.
• Historically the 5 year fixed is most popular, with shorter 2-3 year mortgage terms equally popular in 2024.

5-Year Fixed Mortgage Rates Are Best For…

• Those looking for mortgage rate predictability and peace of mind for the next 5 years.
• Borrowers who are uncomfortable with interest rate swings or believe that mortgage rates may increase further.
• Borrowers who prefer the interest savings that come with lower 5-year fixed mortgage rates now and are OK if mortgage rates drop in 1-2 years.
• Those who plan to pay down their mortgage faster over 5 years, get a lower mortgage rate while the balance is higher.

5 Year Fixed Rates Compared to 1-4 Year and Variable Rates

Will the 5 year fixed rate save you more than 2 or 3 year mortgage rates? 

What do the numbers look like? 

Here, we look at how the 5 year fixed mortgage rates Ontario compare to other fixed rate terms (1 – 4 year rates) through a simulation of future mortgage rate potentials. We then discuss risks, costs and benefits associated with shorter term mortgages compared to the 5 year.

If you are interested in the variable rate comparison, a 5 year fixed and variable rate mortgage comparison can be seen here.

We will look at two potential simulations/ scenarios:

1. Current Rate Consensus: If rates decline over the next 5 years, based on the economic consensus currently indicated by economists and financial market data. We take a more careful or conservative approach, erring on the side of caution in case rates remain higher for longer.
2. Break Even: We look at the case where the 5 year fixed rates cost of financing is closer to break even outcomes compared to 1-4 year fixed terms. In other words, what would mortgage renewal rates need to look like over the next 1-4 years for these shorter terms to provide a similar cost outcome?

To help understand these simulations, please note:

• We are using a $100,000 base amount to help illustrate the concepts.
• All calculations are compared within 5 years. For example, when comparing a 2 year term, we are focused on the 3 year difference at renewal – not shorter or longer than 5 years total.
• Note the current rate is being compared to the hypothetical/ forecasted rate on the renewal date at the end of the term.
• This tool is updated quarterly. It is not using today’s exact rate, but should be close enough for for a reasonable approximation. Connect with Altrua for a more personalized calculation based on your rate quote. 

1. Current Rate Consensus Based Comparison

As previously noted, this simulation is based on a current economic consensus and reading of financial markets (ie. bond yields, treasuries, rate swaps). In other words, based on how billions of dollars are flowing through the financial system, so from this perspective, the markets are placing sizable bets that rates might play out like this.

But this outcome isn’t guaranteed, and the consensus changes over time. Accordingly, if the consensus changes, we update this information quarterly to reflect it.

Another way of comparing these rates, is by asking the question: What would these shorter term mortgages need to look like on renewal to break even with a 5 year?

How much higher would the shorter terms need to be to cost the same or very close to a 5 year fixed mortgage? The next simulation addresses these questions.

2. Break Even Comparison

Please note the break even rates are in the ‘Renewal Data and Rate’ column. The calculations come close to breaking even but are not exacting.

This simulation illustrates an average of current fixed rates and what would be needed on renewal to break even with today’s average 5 year fixed rate.

Mainly, what this shows us is if the renewal rates in 1,2,3 or 4 years are lower than the rates indicated above, then you should save more than the current 5 year fixed mortgage rates.

But if rates are higher on these renewal dates, the 5 year fixed mortgage rates may have been a better option.

When comparing this simulation to the ‘Consensus’ simulation above, we can see that the market is generally pricing lower renewal rates than these ‘break even’ renewal rates. So, the difference between these higher break even rates and the lower market consensus rates can be seen as a buffer or safety net.

However, as noted, economists and financial markets are not always right, and, for example, if inflation continues to run high and rates don’t fall as expected, or enough to ‘break even’, then the 5 year fixed could be the better choice.

With this data in mind, the information and discussion below will help to provide more guidance on the 5 year fixed rate mortgages.

Mortgage Rate Discussion – Is a 5 year fixed rate best for you?

Because no one can predict the future with certainty, there is no guarantee for what term will save you the most in mortgage interest costs. However, often, there is a ‘best fit’ term for borrowers, depending on their risk tolerance, comfort levels and expectations for the economy.

We saw in the simulation above that if the economy and interest rates eventually move lower, then a 2 or 3-year fixed term may save you on interest costs. However, these savings are not guaranteed, and if there is continued inflation or a major global ‘event’ prompts higher rates, then the 2-3 year fixed could prove more costly.

Even if rates drop over the next 1-2 years, then not all is lost. If a lower 5 year fixed rate is enjoyed for 1 or 2 years, then it will take more time to break even versus lower market rates. Also,  a 5 year fixed rate, even if at a higher cost, would have provided insurance and peace of mind that you would not pay more over the 5 years. This payment stability and peace of mind is hard to discount.

In summary, those who select the 5 year fixed rate are willing to give up the potential for a lower rate sooner to protect themselves from potentially higher rates in coming years. But like any insurance cost, even if the insurance does not need to be used, it does not mean paying for it was a bad idea.

Another way to look at it is, if you identify as a conservative investor that prefers more safety to higher returns, the 5 year may be a decision that aligns better with you.

Special Comment on the 1 Year Vs 5 Year Rate

In our simulation, the 1 year fixed rate resulted in savings vs the 5 year term. However, it should be pointed out that the risk with the 1 year term is higher, because for rates to drop, the economy in Ontario and across Canada likely needs to weaken further for inflation to fall. It could be that 1 year is not enough time for inflation to drop, and there could even be a resurgence of inflation within 1 year.

However, over 2 or 3 years, the likelihood of high rates slowing the economy and inflation is greater, which reduces the risk (but does not completely avoid the risk) that rates will still be higher on the renewal of these terms.

Advantages and Disadvantages of 5-Year Fixed Rates in Ontario

In Ontario, the 5-year fixed-rate is currently the most popular mortgage type, representing approximately 50% of total mortgages in 2024. Here, we review more specifically the advantages and disadvantages of this rate, which should be considered alongside your financial situation and long-term plans.

Advantages

The 5-year fixed-rate mortgage provides several benefits, making it a good choice for many homeowners:

Payment Stability: The biggest advantage of a 5-year fixed rate is stability. By locking in an interest rate for five years, homeowners gain the assurance of knowing exactly what their mortgage payments will be. This predictability can prove invaluable from a peace of mind perspective, allowing for accurate budgeting and financial planning without worrying about fluctuating interest rates.

Market Competition: Given the historical popularity of the 5-year fixed rate, it’s a central point of attention for lenders vying for mortgage business. This heightened competition can lead to lower profit margins or ‘spreads’ at lenders, and more advantageous terms for borrowers, resulting in opportunities to negotiate better interest rates or other beneficial features.

Lower Rates: In 2024 5-year fixed rates are currently lower than other mortgage terms, such as a 3 year fixed or variable rate. This allows borrowers to lock in these lower rates longer, protecting them against potential rate increases over the next several years.

Qualification Ease: Because of the stricter stress test rules for qualifying for a mortgage, a 5-year fixed-rate mortgage often makes it easier for homebuyers to meet the requirements, making the path to homeownership slightly less challenging.

Refinance Increase and Blend: A 5-year fixed-rate mortgage usually allows borrowers to increase their mortgage amount through a ‘refinance’ and blend the existing rate with the new amount. This flexibility provides a viable option for homeowners to leverage their home equity without breaking their current terms.

Portability: Another advantage of 5-year fixed-rate mortgages is their portability. If you decide to move during your mortgage term, you can often transfer your mortgage to a new property without incurring penalties, providing valuable flexibility.

Lower Penalties Near Term End: Breaking a mortgage often involves penalties, especially for fixed-rate terms. However, the penalties for breaking a 5-year fixed-rate mortgage usually decrease as you approach the end of the term.

Disadvantages

However, there are also certain disadvantages to 5-year fixed-rate mortgages that borrowers should consider:

High Breakage Cost: If the market rates decrease significantly during the first three-quarters of the term, the cost to break the mortgage to switch to a lower rate can be prohibitively high. While locking in a rate for 5 years provides security, it can also mean missing out on potential savings if rates drop.

Higher Breakage Penalties: Following the above flexibility limitation, 5-year fixed-rate mortgages have higher penalties for breaking the term early than shorter-term or variable-rate mortgages. This can be a significant disadvantage if your circumstances change and you need to adjust your mortgage before the end of the term for reasons other than lowering your rate.

Limited Lender Options: Choosing a 5-year fixed-rate mortgage can restrict your options if you’re considering moving or seeking a refinance or equity takeout within the term. Some lenders may not offer the same rates or terms for these situations, potentially resulting in higher costs.

While the 5-year fixed-rate mortgage offers excellent advantages, including payment stability and competitive rates, it’s essential to consider the potential downsides, such as high breakage costs and penalties. It’s important to carefully examine your financial circumstances, long-term goals, and tolerance for risk before making a decision. Doing so lets you choose the mortgage product that best suits your unique needs and objectives.

Factors Influencing 5-Year Fixed Mortgage Rates

Several factors influence the 5-year fixed mortgage rates in Ontario. Some of the most significant elements include lender competition, the lender’s perception of the housing market and economic risk, the role of comparable financial market instruments, and the impact of down payment or equity.

Lender Competition

The mortgage lending landscape is a highly competitive arena. With numerous lenders vying for business, rates are often influenced by the level of competition. Lenders may lower their rates to attract potential borrowers, which can cause other lenders to adjust their rates in response.

Lender’s Perception of Housing Market and Economic Risk

Lenders closely monitor the housing market and the broader economy when setting their rates. If a lender perceives high risk due to economic uncertainty or instability in the housing market, they may increase their rates to offset potential losses. This is known in the mortgage industry as a higher ‘lender spread’. Conversely, lenders might offer lower rates in a stable and strong economy with a robust housing market.

Role of Comparable Financial Market Instruments

Comparable financial market instruments, particularly the 5-year Government of Canada Bond Yield, play a key role in influencing the 5-year fixed mortgage rates. Generally, an increase in the yield on these bonds prompts an uptick in mortgage rates, while a decrease often leads to lower mortgage rates.

Impact of Down Payment or Equity

The size of the down payment or the equity available can also significantly impact the interest rates offered by lenders. This reflects the borrower’s “skin in the game” – a larger down payment or equity stake reduces the lender’s risk. Here’s a basic breakdown:

·       CMHC Insured/ High Ratio: Borrowers who pay a 2.8% to 4.5% CMHC premium (included in the mortgage) can access the lowest rates as the premium protects the lender from default.

·       20% Down Payment: This minimum down payment is required to avoid CMHC insurance. As it exposes the lender to more risk, rates may be slightly higher.

·       25%, 30%, and 35% Down Payments: As the down payment increases, the interest rates tend to get lower. Often, the lowest rates comparable to CMHC-insured rates are available to borrowers who can put down 35%.

We aim to provide the absolute lowest market rate given the application requirements. We work with clients to navigate these influencing factors and secure the best possible mortgage rates.

Tips for Securing the Best 5-Year Fixed Rate

Getting the best 5-year fixed rate requires attention to detail and proper financial preparation. Here are some essential tips to help secure the most favourable rate:

1. Importance of Market Research

An overview of the market rates available in the market is a crucial first step. By shopping around and comparing different lenders’ rates, you can understand what’s competitive. Don’t settle for the first offer you receive – there might be better options out there. For the few minutes involved with calling another source, the savings could be thousands.

2. Ensuring a Balance Between Rate and Fine Print

While a low rate is attractive, reading the fine print is essential. Some lenders may offer seemingly competitive rates, but their contract conditions could lead to more expenses later on. Take the time to understand the terms and conditions associated with the mortgage. If necessary, engage a lawyer or a financial advisor to help you dissect the more complex aspects of the contract.

3. Importance of Maintaining Good Credit

A good credit score is integral to securing the best possible rate. Lenders consider borrowers with strong credit histories less risky, thus offering them more favourable rates. Ensure your credit is in good shape, with no missed payments in the past three months and no credit cards over the limit. Regularly check your credit report and promptly correct any errors you find.

4. Mortgage Documents

Having the necessary mortgage documents ready can speed up the approval process. These documents usually include:

• Employment letter
• Recent paystub
• Proof of down payment (if applicable)
• Government-issued IDs

Being organized and prepared increases your chances of promptly securing the best rate.

Securing the best 5-year fixed rate involves more than just scanning for the lowest number. It requires a thorough understanding of your financial standing, the mortgage market, and a mortgage contract’s commitment. These tips can guide you toward securing a rate that best suits your circumstances.

Alternatives to 5-Year Fixed Mortgages

While 5-year fixed-rate mortgages are a popular choice among Canadian homebuyers, alternative mortgage options are available. These alternatives can suit your individual financial circumstances and risk tolerance.

3-Year Fixed Rate Mortgage

A 3-year fixed-rate mortgage can be viable for borrowers seeking short-term stability without tying themselves into a longer commitment. This option provides payment security for a considerable period and, in a fluctuating interest rate environment, could allow borrowers to access lower rates sooner if rates fall.

4-Year Fixed Rate Mortgage

Similarly, a 4-year fixed rate mortgage offers the security of a fixed rate for nearly as long as a traditional 5-year term. This option provides slightly more flexibility than its 5-year counterpart, allowing borrowers to reassess their interest rate situation relatively sooner.

Variable Rate Mortgage

A variable-rate mortgage offers the potential for lower rates over time, especially if market interest rates fall. While these rates may initially increase, they are likely to decrease over the next few years, given the right economic conditions. Historically, a dedicated variable rate strategy has proven to save borrowers more in the long term. Additionally, variable mortgages often have more predictable penalties, typically equivalent to three months’ interest.

10-Year Fixed Rate Mortgage

Although less common, a 10-year fixed-rate mortgage is an option for borrowers seeking long-term security. However, considering the current economic cycle, where rates are on the higher end of the historical range (adjusted for debt and housing prices), committing to such a long term at higher rates poses a significant risk. On the other hand, if rates unexpectedly remain high for a prolonged period, this mortgage option could prove beneficial.

Each alternative has advantages and drawbacks, much like a 5-year fixed-rate mortgage. The choice ultimately depends on the borrower’s circumstances, risk tolerance, and future expectations of interest rate movements. It’s always advisable to consider all options and consult a mortgage professional before deciding.