Does Canada Have Fixed-Rate Mortgages?

Fixed-rate mortgages are a common choice for homebuyers in Canada seeking payment stability. With a fixed-rate mortgage, the interest rate remains constant for the entire duration of the chosen term. This provides predictable payments, allowing borrowers to budget with certainty since payments will not change even if market interest rates fluctuate.

Understanding Fixed-Rate Mortgages in Canada

A fixed-rate mortgage locks in the interest rate for a specific term. The interest rate and monthly payment amount remain constant for the entire term. This provides homeowners with a clear understanding of their mortgage expenses, simplifying household budgeting.

Common fixed-rate mortgage terms available in Canada typically range from six months up to 10 years, with the five-year term being the most frequently selected option by borrowers. The fixed rate applies only to this specific term, not to the entire life of the mortgage. At the end of each term, the mortgage must be renewed, at which point a new rate and term will be negotiated or the borrower can choose to switch lenders.

Payments remain constant throughout the chosen term. Each payment consists of both principal and interest, though the proportion allocated to principal increases as the mortgage balance decreases. In Canada, mortgage interest is compounded semi-annually, not in advance, as mandated by the Interest Act, regardless of how frequently payments are made.

Fixed-rate mortgages offer payment stability, a distinct advantage over variable-rate mortgages. While variable rates can fluctuate with market conditions, fixed rates ensure the payment amount remains predictable for the entire term. This makes fixed-rate mortgages a strong option for those valuing budget certainty and avoiding rising interest rate risks.

The mortgage term should not be confused with the amortization period, the total time to repay the mortgage. While a typical mortgage term might be five years, the amortization period can be much longer, commonly 25 to 30 years for prime mortgages. A single amortization period encompasses multiple mortgage terms, each requiring renewal. A longer amortization period lowers monthly payments but increases total interest paid.

Factors Influencing Canadian Fixed Mortgage Rates

Fixed mortgage rates in Canada are primarily influenced by the bond market, specifically Government of Canada bond yields. The five-year Government of Canada bond yield is significant as the five-year fixed-rate mortgage is the most common term. Lenders use these bond yields as a benchmark, setting fixed rates 1% to 2% higher to cover costs and risk. Changes in bond yields often precede fixed mortgage rate adjustments, reflecting lenders’ cost of funds.

The Bank of Canada’s monetary policy directly influences variable rates and indirectly affects fixed rates. Adjusting its policy rate impacts market liquidity and investor sentiment, influencing bond yields. For instance, if the Bank of Canada raises its policy rate to combat inflation, bond yields may rise, increasing fixed mortgage rates.

Market competition among lenders also determines fixed mortgage rates. Financial institutions, including major banks, credit unions, and mortgage brokers, compete for borrowers, leading to competitive rate offerings. Lenders may offer different rates to attract new clients, reflecting strategies to gain market share. Borrowers often compare rates from multiple sources for favorable terms.

Lenders consider operational costs, profit margins, and perceived lending risk when setting fixed mortgage rates. These factors contribute to the spread between government bond yields and consumer mortgage rates. The borrower’s financial profile, including credit score, down payment, and income, further influences the specific rate offered, affecting the lender’s risk assessment.

Key Features of Canadian Fixed-Rate Mortgages

Canadian fixed-rate mortgages, especially closed ones, may incur prepayment penalties if broken before term end. Breaking a mortgage occurs if a homeowner sells, refinances, or pays off a substantial portion beyond permitted privileges. Penalty calculation is typically the greater of three months’ interest on the outstanding balance or the Interest Rate Differential (IRD). The IRD reflects the difference between the original mortgage rate and the lender’s current posted rate for a comparable remaining term, applied to the outstanding principal.

Many Canadian lenders offer a “portability” feature, allowing borrowers to transfer their existing mortgage rate and terms to a new property. This feature benefits borrowers if current rates are higher, helping avoid significant prepayment penalties. Portability conditions often include purchasing a new home within 30 to 120 days and remaining with the same lender.

At the end of a fixed mortgage term, borrowers enter a renewal period. Homeowners can renegotiate the interest rate and term with their current lender or explore other financial institutions. This renewal process allows reassessment of financial goals and market conditions, aligning new mortgage terms with the borrower’s current situation.

Some fixed-rate mortgage products offer a convertibility option, especially for shorter terms like six months. This feature allows conversion to a longer-term fixed rate at any point during the term without prepayment penalty. This is advantageous if a borrower anticipates future interest rate decreases, enabling them to lock in a lower rate for a longer period.