Choosing between a three-year and a five-year mortgage is an important decision. Recent economic turbulence pushed interest rates much higher than usual, but inflation has cooled and the Bank of Canada (BoC) announced its first rate cut in four years on June 5. That easing brings relief, but borrowing costs remain elevated, so if you’re renewing your mortgage or buying a property, weigh the options carefully. Below we compare three- and five-year mortgage terms to help you decide which may suit your situation.
Five-year fixed-rate mortgages have long been Canada’s default choice. When rates were low, locking in a five-year rate offered peace of mind and predictable payments. Three-year fixed rates are often slightly lower because lenders price the shorter commitment more competitively, hoping to reprice loans when rates rise. Historically, three-year terms were less popular because homeowners preferred the long-term stability of five-year terms.
That trend shifted when interest rates climbed sharply over the past two years. Many homeowners began choosing three-year terms to avoid being stuck at high rates for a long stretch and to have the chance to refinance sooner if rates fell. Lenders, conversely, prefer longer commitments and may offer slightly better five-year rates to secure customers for a longer period.
What’s a 3-year mortgage?
A three-year fixed mortgage locks your interest rate for 36 months. Your monthly payment is unaffected by changes in the prime lending rate during that term, which makes budgeting easier. Historically, three-year fixed rates have been a little lower than five-year fixed rates, so the shorter term can deliver savings. If market rates decline, you can switch to a lower rate sooner, and shorter terms generally carry lower prepayment penalties if you need to break the mortgage early.
The main risk with a three-year fixed mortgage is that if interest rates rise sharply during your term, you could face higher rates when you renew. More frequent renewals can be time-consuming and, in some cases, costly.
A three-year variable-rate mortgage ties your payments to the prime lending rate. If prime falls, your payments drop; if it rises, your payments increase. Variable rates are typically lower than fixed rates and have often averaged out to lower payments over long periods, but recent rate volatility shows that large increases are possible. Homeowners who took variable rates before 2022 experienced substantial payment increases, which for some led to serious financial strain.
Pros
- Payments stay the same despite interest-rate changes
- If rates fall, you can access lower rates sooner
- Lower penalties if you break the mortgage early
Cons
- Currently, three-year fixed rates may be higher than some five-year offers
- More frequent renewals
- Greater exposure to market fluctuations at each renewal
Pros
- Payments decrease if interest rates fall
- Historically, variable mortgages have often resulted in lower average payments
- Shorter term lets you reassess your mortgage sooner
Cons
- Payments rise if interest rates increase
- Three-year variable rates can be higher than comparable five-year variable offers
- More frequent renewals
What’s a 5-year mortgage?
A five-year fixed mortgage locks in a rate for a full five years, protecting you from rate volatility and giving you longer-term predictability. That stability is attractive for homeowners who prefer to avoid refinancing frequently. However, being locked in for five years reduces flexibility: if rates drop substantially, you may miss the savings unless you break the mortgage early and pay a penalty. A long-term commitment can also be limiting if your financial situation changes or you plan to sell sooner than expected.
A five-year variable mortgage means payments move with market rates. Variable options are often lower than fixed rates over time, but current market dynamics can make variable offers more or less attractive depending on timing. At present, some five-year variable mortgages are priced lower than comparable three-year variable options.
Pros
- Often has a lower rate right now compared with a three-year fixed
- Payments remain steady despite interest-rate swings
- Less frequent renewals
- Better protection if interest rates rise
Cons
- If rates fall, you may be unable to benefit without breaking the mortgage
- Less flexibility for life or financial changes
- Higher penalties if you break the mortgage early
Pros
- Payments fall if interest rates drop
- Historically, variable mortgages can average out to lower costs
- May currently be priced lower than three-year variable options
- Fewer renewals than a three-year term
Cons
- Payments rise with interest-rate increases
- Longer commitment reduces flexibility
Where are interest rates headed?
The steep interest-rate increases of recent years put pressure on millions of Canadian homeowners. Although inflation has cooled in early 2024, the prime rate remains elevated—around 6.95%, down only slightly from a recent high near 7.2%. Economists expect the BoC’s June rate cut to be the start of gradual declines over the coming years. Many forecasts anticipate roughly a 1% reduction by year-end and stabilization near 5.2% by the end of 2027.
How to decide on a mortgage term
Your choice depends on interest-rate expectations, your tolerance for risk, and your plans for the property. If forecasts prove correct and rates trend downward, a variable-rate mortgage could let you benefit from falling rates—provided your budget can absorb temporary increases. Currently, five-year variable offers may be priced more attractively than three-year variable options, making them worth considering.
If any payment uncertainty causes you anxiety, a fixed-rate term provides guaranteed monthly payments. A three-year fixed term gives shorter-term security while allowing you to renegotiate sooner if rates fall. A five-year fixed term offers longer stability but risks locking you into higher payments while rates decline.
Ultimately, choose the term that fits your financial comfort zone and life plans: whether you intend to stay in the home long-term or want flexibility to move or refinance sooner. Assess your budget, compare current fixed and variable offers, and pick the mortgage structure that matches your risk tolerance and timeline.
Read more about mortgages in Canada:
- Rates are going down—Is now a good time to buy a home?
- Making sense of the Bank of Canada rate cut on June 5, 2024
- How much income do I need to qualify for a mortgage in Canada?
- Mortgage broker vs. bank—Which saves you more?