Your mortgage term determines how long your interest rate is locked in. Choosing the right term is one of the most impactful decisions you'll make—yet many borrowers default to 5 years without considering alternatives.
Understanding Mortgage Terms
What's a Mortgage Term?
The term is the length of your current mortgage contract. At the end of the term, you must renew (or pay off the mortgage).
Important distinction:
- Term: Length of rate contract (e.g., 5 years)
- Amortization: Total payoff time (e.g., 25 years)
Available Terms in Canada
| Term Length | Common? | Rate Position |
|---|---|---|
| 1 year | Less common | Usually lowest |
| 2 years | Available | Lower |
| 3 years | Popular | Mid-range |
| 4 years | Less common | Mid-range |
| 5 years | Most popular | Often highest |
| 7 years | Rare | Highest |
| 10 years | Available | Highest |
Compare Your Options
Get rate quotes for different term lengths and see which saves you the most.
Term-by-Term Breakdown
1-Year Fixed
Best for: Expecting rate drops, selling soon, testing the market
| Pros | Cons |
|---|---|
| Often lowest rate | Renewal annually |
| Maximum flexibility | More paperwork |
| Adjust quickly to rate changes | Rate uncertainty |
Current advantage: If you believe rates will fall, lock in 1 year and renew at lower rate.
2-Year Fixed
Best for: Medium-term planning, transitional situations
| Pros | Cons |
|---|---|
| Lower than 5-year | Renews in 2 years |
| Less commitment | Some rate uncertainty |
| Good for life changes | May miss better rates |
Ideal scenario: Planning to move or upgrade in 2-3 years.
3-Year Fixed
Best for: Balance of rate security and flexibility
| Pros | Cons |
|---|---|
| Balanced approach | Less popular (fewer options) |
| Lower than 5-year | Still faces renewal |
| Reasonable security | May break if life changes |
Growing popularity: Many borrowers finding 3-year offers best value.
4-Year Fixed
Best for: Slight discount from 5-year, avoids renewal year
| Pros | Cons |
|---|---|
| Usually slightly less than 5-year | Less common |
| Good rate security | Fewer lender options |
| Renewal doesn't align with life milestones | Limited availability |
5-Year Fixed
Best for: Maximum rate certainty, peace of mind
| Pros | Cons |
|---|---|
| Rate security for 5 years | Often highest rate |
| Most common/available | Highest penalties if broken |
| Predictable budgeting | May miss rate drops |
| Peace of mind | 60-70% break before term ends |
The reality: Despite being most popular, statistics show most mortgages are broken before 5 years.
Rate Comparison Example
Typical rate spread (2026 example):
| Term | Rate | Rate vs. 5-Year |
|---|---|---|
| 1-year fixed | 4.49% | -0.50% |
| 2-year fixed | 4.59% | -0.40% |
| 3-year fixed | 4.69% | -0.30% |
| 4-year fixed | 4.89% | -0.10% |
| 5-year fixed | 4.99% | Baseline |
Rates are examples—actual rates vary daily
Cost of Choosing 5-Year vs. Shorter
$500,000 Mortgage Comparison
| Term | Rate | Monthly Payment | 5-Year Interest Cost |
|---|---|---|---|
| 1-year × 5 | 4.49% (assumed constant) | $2,759 | $89,540 |
| 3-year + 2-year | 4.69% then 4.59% | $2,793 avg | $91,580 |
| 5-year fixed | 4.99% | $2,846 | $95,760 |
Potential savings: $6,000+ by avoiding 5-year fixed.
But consider: Rates might rise, not fall. The premium for 5-year is the cost of certainty.
Penalty Considerations
Why Term Length Affects Penalties
Fixed-rate prepayment penalties are based on remaining term:
| When You Break | 5-Year Penalty | 3-Year Penalty |
|---|---|---|
| Year 1 | 4 years IRD | 2 years IRD |
| Year 2 | 3 years IRD | 1 year IRD |
| Year 3 | 2 years IRD | 3 months interest |
| Year 4 | 1 year IRD | N/A (renewed) |
Shorter term = Lower maximum penalty
Decision Framework
Choose Shorter Term (1-3 years) If:
- [ ] You might sell within term
- [ ] Life changes are possible (job, family)
- [ ] You believe rates will fall
- [ ] You want lower rates now
- [ ] You can handle rate uncertainty
Choose Longer Term (5 years) If:
- [ ] You value payment certainty
- [ ] You're at budget maximum
- [ ] You believe rates will rise
- [ ] Your life situation is stable
- [ ] You sleep better with security
The Historical Perspective
| Strategy | Historical Win Rate |
|---|---|
| Variable rate | ~85% of the time |
| Short-term fixed (1-3 year) | ~75% of the time |
| 5-year fixed | ~25% of the time |
Interpretation: Shorter terms usually win—but not always. The times they lose can be significant.
FAQ
Q: What's the most popular mortgage term?
A: 5-year fixed is chosen by about 70% of Canadians. But popularity doesn't mean it's optimal.
Q: Can I switch from variable to fixed mid-term?
A: Usually yes—your lender can convert to their fixed rates, or you can refinance.
Q: What term do mortgage brokers recommend?
A: Depends on your situation. Good brokers discuss your timeline, risk tolerance, and rate outlook.
Q: Are rates always lower for shorter terms?
A: Usually, but not always. Sometimes the yield curve inverts and longer terms are cheaper.
Q: What if I choose 1-year and rates go up?
A: You'd renew at higher rates. This is the trade-off for the initial savings.
What's Next
Not sure which term fits your situation? Connect with our team and we'll analyze your timeline, risk tolerance, and goals to recommend the optimal term.
Ready to Get Started?
Contact us today for personalized mortgage advice and competitive rates.
