Your mortgage term is one of the most important decisions you'll make—it determines how long your rate is locked in, when you'll need to renew, and how much flexibility you have. Here's how to choose the right term for your situation.
Understanding Mortgage Terms
First, let's clarify terminology:
- Term: The length of your mortgage contract (typically 1-10 years)
- Amortization: The total time to pay off your mortgage (typically 25-30 years)
Example: You might have a 5-year term within a 25-year amortization. At the end of 5 years, you renew for a new term.
Available Term Options in 2026
| Term | Current Rate Range | Best For |
|---|---|---|
| 1 year | 5.49% - 5.99% | Short-term needs, expecting rate drops |
| 2 year | 4.49% - 4.99% | Expecting rate drops in 2+ years |
| 3 year | 4.19% - 4.69% | Balanced flexibility |
| 5 year | 3.89% - 4.49% | Most borrowers, stability |
| 7 year | 4.49% - 4.99% | Long-term stability seekers |
| 10 year | 5.29% - 5.79% | Maximum payment certainty |
Rates approximate for Q4 2025 - check current rates
Short Terms (1-3 Years): Pros and Cons
Advantages
- Lower rates when yield curve is inverted (short rates < long rates)
- Flexibility to renegotiate sooner
- Opportunity to benefit if rates drop further
- Lower penalties if you break early (with variable especially)
Disadvantages
- Rate risk at renewal
- More frequent renewals (time and effort)
- Uncertainty about future payments
- Potential stress watching rate movements
Who Should Consider Short Terms
- You believe rates will drop significantly
- You may sell or refinance within 1-3 years
- You're comfortable with rate uncertainty
- You're actively managing your mortgage strategy
Consider Your Term Carefully
Get pre-approved today and we'll help you choose the optimal term for your specific situation and goals.
Long Terms (5+ Years): Pros and Cons
Advantages
- Payment certainty for budgeting
- Protection from rate increases
- Peace of mind (no rate watching)
- Less frequent renewals
Disadvantages
- Higher rates in current inverted curve
- Larger penalties if you break early (especially IRD)
- Less flexibility to take advantage of falling rates
- Locked in even if circumstances change
Who Should Consider Long Terms
- You want payment stability above all
- You're at maximum affordability
- You're staying in this home 5+ years for certain
- Rate uncertainty causes you stress
- You value simplicity over optimization
The Penalty Factor: Critical Consideration
Penalties for breaking your mortgage can be substantial and vary dramatically:
Fixed Rate Penalty Calculation
Greater of:
- Three months' interest
- Interest Rate Differential (IRD)
| Mortgage Balance | 3-Year Remaining | Potential IRD Penalty |
|---|---|---|
| $400,000 | 3 years | $12,000 - $20,000+ |
| $500,000 | 3 years | $15,000 - $25,000+ |
Variable Rate Penalty
Typically just 3 months' interest:
| Mortgage Balance | 3 Months Interest |
|---|---|
| $400,000 at 5% | ~$5,000 |
| $500,000 at 5% | ~$6,250 |
The takeaway: If you might move, refinance, or access equity before term end, factor penalties into your decision.
Learn more about mortgage penalty calculations.
The 2026 Rate Environment
What's Happening Now
- Bank of Canada has completed major easing cycle
- Short-term rates still elevated vs. long-term
- 5-year fixed offering best value for most borrowers
- Variable rates competitive for those expecting further cuts
Strategic Considerations
If you believe rates will stay stable or rise:
- Lock in 5-year fixed at current rates
- Consider 7-10 year for maximum protection
If you believe rates will drop further:
- Shorter terms (2-3 year fixed)
- Variable rate mortgage
- Renew into lower rates when term ends
Term Strategy by Situation
| Situation | Recommended Terms |
|---|---|
| First-time buyer, planning to stay | 5-year fixed |
| Might sell in 2-3 years | 2-3 year fixed or variable |
| Self-employed with variable income | 5-year variable (lower penalty) |
| At maximum affordability | 5-year fixed (payment certainty) |
| Expecting major life changes | Shorter term or variable |
| Refinancing soon | 1-2 year or variable |
FAQ
Q: What term do most Canadians choose?
A: The 5-year fixed remains most popular (about 60% of borrowers), though 2-3 year terms have gained popularity in the current rate environment.
Q: Should I match my term to my plans?
A: Yes! If you know you'll sell in 2 years, don't take a 5-year fixed (penalties). Consider a 2-year term or variable.
Q: Can I switch from variable to fixed mid-term?
A: Most variable mortgages allow conversion to fixed anytime without penalty. You'll get the current fixed rate for the remaining term.
Q: What if I'm unsure about my plans?
A: Variable rate offers most flexibility (3-month penalty). Alternatively, a shorter fixed term reduces penalty exposure.
Q: Are longer terms (7-10 years) worth it?
A: Rarely. The rate premium is significant, and penalties are enormous if you break early. Very few people stay in the same mortgage for 10 years.
What's Next
The right term depends on your personal situation, risk tolerance, and plans. Talk to our team for personalized term recommendations based on your specific circumstances.
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