First, the distinction people mix up. The amortisation is how long until the mortgage is fully repaid, commonly twenty-five years. The term is how long your current contract runs, commonly five. At the end of the term you renew for another one, and you do that four or five times over the life of the mortgage.
The five-year fixed is the default in Canada by an enormous margin, and most people arrive at it because it is what they were offered rather than because they weighed it.
What the term actually controls
Three things.
When you next negotiate. Renewal is the only moment you can move lenders without a penalty. A five-year term means five years before you get that leverage again. A two-year term means two.
How long you are exposed to a penalty. Break mid-term and you pay. The longer the term, the longer the window in which life can intervene, and the larger a fixed-rate interest rate differential tends to be, because it is calculated over the time remaining.
How long your rate is certain. The reason people take longer terms, and a genuine benefit.
Shorter terms price lower
Not always, and usually. A one, two or three year fixed typically carries a lower rate than a five year fixed, because the lender is committing for less time and taking less risk.
So a shorter term often means a lower rate and more frequent opportunities to renegotiate. What you give up is certainty, and the possibility that rates are higher when you renew.
Choosing on your life rather than on forecasts
The useful question is not where rates are going. Nobody knows. It is what you expect to happen to you.
Take a shorter term if there is a realistic chance you will move, sell, separate or refinance within a few years. If you might be somewhere else in two years, do not commit for five and expose yourself to a differential penalty. Also take a shorter term if you expect your income or your file to improve substantially, since you will negotiate from a stronger position sooner.
Take a longer term if you are settled and expect to stay, if a payment change would cause real difficulty, or if you are stretched close to your qualifying limit and need certainty above all.
Someone buying a starter home they expect to outgrow, or moving to a job that might relocate, is frequently better served by two or three years than by five, regardless of what rates do.
The under-used middle
Three-year fixed is the term most often overlooked, and it is frequently the sensible answer.
It typically prices below a five-year, it halves your exposure window, and it still gives meaningful certainty. For someone who wants stability but cannot honestly say where they will be in five years, it is a better fit than either extreme.
Two-year fixed suits someone expecting a specific change: a business becoming established, credit repair completing, or two years of tax returns accumulating for a self-employed file that will place much better afterwards.
When a one-year term makes sense
Narrower, but real. It fits someone in an alternative or B-lender mortgage working through a repair plan, where the objective is to reach A-lender eligibility as soon as possible and being locked in longer would defeat that. See B lender mortgages.
It also suits someone who genuinely expects to sell within the year, where a penalty on any longer term would be wasted money.
The mistake worth avoiding
Taking a five-year fixed at an attractive rate on a restricted product, then moving in year two.
The rate was excellent. The penalty on a differential calculated against posted rates, on a mortgage that cannot be ported, comfortably erases several years of savings. That combination, a long term plus a restricted product plus a life change, is the single most expensive sequence in Canadian mortgages.
If you take a long term, make sure the product is portable and the penalty calculation is fair. Ask specifically. See how penalties are calculated and what to compare beyond the rate.
Revisit it at every renewal
Your term choice is not permanent. Every renewal is a fresh decision, and your circumstances at year five are not the ones you had at year zero.
Someone who took five years while raising small children may want three years while considering a move. Renewal is the moment to reconsider the whole structure at no cost. See the renewal page.
