Is now the time to pounce on a five-year fixed-rate mortgage?

If you’re an existing or prospective mortgage holder, you’re probably wondering what exactly is going on right now with interest rates, and whether or not you should lock in a sweet five-year fixed rate. 

You may have noticed, for instance, that some lenders like TD Canada and National Bank of Canada have started to increase the interest rate on their five-year fixed-rate mortgages by anywhere between 0.1 and 0.2 of a percentage point. That’s because of recent increases to bond yields, and other lenders are expected to follow suit shortly.

What do bond yields have to do with my mortgage? 

Many factors affect your mortgage rate. There are the factors you can control, like your credit history and down payment. And then there are factors you can’t control, like the overnight interest rate set by the Bank of Canada (BoC), and the rates for investments, such as five- and 10-year fixed income bonds. The thing to know is this: when bond yields increase, so do fixed-rate mortgages. 

The yields on Canadian bonds of all kinds spiked recently. That spike happened because bonds are affected by economic growth (in Canada, the U.S., and globally), and actions taken by the BoC.

This recent spike is due to what’s going on in the U.S., says Sean Cooper, Toronto-based mortgage broker and author of Burn Your Mortgage. American investors are feeling more confident thanks to the rollout of several COVID-19 vaccines, massive infrastructure investment, and the overall investment in the U.S. economy. While Canada is two to three months behind the U.S. with its vaccination plan, recent reports show investor optimism here, too.

There are also some concerns among investors about rising inflation and how that will affect mortgage rates, but the Bank of Canada’s role is to manage inflation so there’s no reason to expect double-digit mortgage rates like there were in the ’80s. 

Is now the time to lock in a five-year fixed rate? 

With five-year fixed rates on the rise, you might be experiencing a now-or-never mentality but the increase is minimal. There might be a small increase in your bi-weekly or monthly mortgage payments if you haven’t locked in a rate yet but unless you are extremely financially constrained, it shouldn’t have a significant impact. 

But whether you lock in now ultimately depends on what you want, says Toronto-based mortgage broker Leanne Shearer. “If you want stability in your mortgage or if it’s an investment, then locking is an option.” The cost difference is small with the rate increase, but if you like knowing the exact monthly or bi-weekly amount, or you want the best rate possible, then locking down a fixed rate makes sense. 

But before you lock in, Shearer says, it’s key to know where you’re going to be in the next five years. Cooper agrees with this assessment. Both brokers say that more than half of Canadians who have a fixed-rate mortgage break it before the end of the term because they see a lower rate or their life circumstances have changed. “The penalties can be high,” says Shearer. “Lenders never give away money for free. They will get that money somehow.”

Another reason to lock in a fixed rate is due to financial strain. An increase in a variable-rate mortgage may create pressure on your finances. If you can’t afford the extra money that may come with a rate increase, then consider locking in, but make sure you have the flexibility to make extra payments on your mortgage or transfer it if you decide to sell and buy another property. 

Plus, if you’re currently shopping for a home, it’s always good practice to lock in a mortgage pre-approval rate for 90 to 120 days. 

Could variable rates start to rise too?

With five-year fixed rates on a seemingly upward trajectory as of late, you might be wondering: what about variable rates?

The good news here is that variable rates aren’t tied to bond yields. Instead, they tend to follow the BoC’s policy rate announcements, which happen eight times a year. As of this writing, variable rates haven’t moved upwards — and both Cooper and Shearer don’t see them going up any time soon. The BoC itself has said that it won’t raise rates until 2023, though this is no guarantee. 

Shearer is aware of reports that fixed rates are going to keep rising but cautions homeowners and buyers not to focus entirely on the mortgage rate. “You need to read the fine print. If the rate is too good to be true, it probably is.”

As of this writing, the lowest five-year fixed mortgage rate on our site was 1.64%.