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The “5 by 5” (Renew a fixed five year mortgage five times) mortgage strategy (pret hypothecaire)

Should you choose the “5 by 5” (5 ans fixe) mortgage strategy when you purchase your home? This is a very common mortgage strategy, especially in Canada, though not in the rest of the world. It is so widespread that many Canadians think it is the only type of mortgage that is available, and that they are limited in their negotiations with a bank to the interest rate on their mortgage.

Why is the “5 by 5” (terme 5 ans fixe) strategy so popular? I imagine it is probably because it has been the most customary (my parents…) and due to all of the advertising the big banks have done to promote it (to their own profot).
(NOTE: if it is more expensive for us, it is more profitable for them!)

Description

What exactly is the “5 by 5” strategy? As you can tell from the name, it means you take a mortgage out on your property for five years, at a fixed rate, and then you renew it at the end of the five year term.
If you visit any bank or call any mortgage broker and ask for the best mortgage rate available, they will automatically give you the rate for the five year fixed rate home loan, even if you did not indicate that kind of loan.

Advantages

-Available at institutions
-A lot of competition for the five year fixed term interest rate
-Mortgage payments do not vary for 5 years
-The strategy is very easy to understand
-No change in interest rate until the end of the period

Disadvantages

•At the maturity of the loan, you will have a new current rate, and you have to renew at that rate
•The possibility exists that you will have a major increase in mortgage payments every five years
•If you try to pay your mortgage off before the maturity date, there will be stiff fines

When to use the “5 by 5” strategy

Generally, it would be very rare that each time you renew your home loan it would coincide with a time when interest rates were very low. If you could be sure that in five years, mortgage rates –taux hypothecaire - will not be higher than they are now, then it would be a great idea.

If you believe that interest rates will be higher at the end of the five year term of your loan, the strategy you should choose is the long term strategy. If you believe that rates will be stable, or go down, you should choose the variable rate strategy. And, if you are like most borrowers and are not sure which way interest rates will head, there is a strategy for you as well. (Get in touch with us and we can discuss it with you.)

If you are certain that you want to relocate in exactly 5 years, or if you need to get a new term in exactly 5 years, or if there are only 5 years left on the term of your mortgage, then the “5 by 5” strategy is probably the best one for you.

Conclusion

Before choosing the same – hypotheque - home loan as everyone else, or the one that your bank wants you to pick, take the time to examine and to analysis all of the other strategies. Consult a mortgage broker who really understands the different strategies, before you make your choice.

It’s an important choice!