Should you choose the 5 by 5 (5 year fixed) mortgage strategy when you purchase your home? This is a very common mortgage solution, especially in Canada, though not in the rest of the world. It is so common that many Canadians believe 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 home loan.
Why is the 5 by 5 (terme 5 ans fixe) strategy so common? I presume it is probably because it has been the most customary (my parents ) and because of all of the advertising the big banks have done to promote it (to their own profot).
(NOTE: if it is more expensive for the consumer, it is more profitable for the banks!)
Description
What exactly is the 5 by 5 strategy? As you may be able to 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 period.
If you visit any bank or call any mortgage broker and ask for the best mortgage rate they have, they will automatically give you the rate for the five year fixed rate home loan, even if you did not specify that kind of loan.
Are there advantages to the 5 by 5 mortgage strategy? Yes, there are certain advantages such as:
It is easily obtained at just about any bank There is a great deal of competition for this type of business Your payments will not change for 5 years It is an easy strategy to understand There will be no interest rate changes until the end of the five year term
There are also disadvantages in this strategy.
The rate changes at the end of the five year period, and you have to renew at this rate, even if it is higher
There may be a big jump in your mortgage payments every five years
You will face penalties if you pay the loan off earlier than the maturity date.
So, should you ever use the 5 by 5 strategy?
Yes, if for some reason, you believe that interest rates would be lower at the end of your five year loan period, however, the chances of interest rates taux hypothecaire - being lower just at the point when you need to renew would be very rare.
If you think interest rates are going to be higher when you need to renew, there is a better approach for you to use, and that is the long term strategy. If you believe that rates will remain the same or even go lower, there is also a better approach for you and that is the variable strategy. If you are not sure whether rates will go up or come down, there is still another strategy that will work. (Contact us and we will tell you all about it.)
Perhaps by some chance you know that you will be changing residence in exactly five years, or you have exactly five years remaining on your mortgage or you know that you will want to refinance in precisely five years, this strategy may be for you.
What deductions can we draw from this? You must examine every mortgage strategy that is available, and not just the one that everyone else has, or the one that your lender wants you to take. The best way to do this is to consult with a mortgage broker who is an expert in all of these types of hypotheque - mortgage strategies and can show you all of the choices. What a critical choice it is!
