Ratehub.ca data has found an uptick in interest in shorter-term fixed-rate mortgages from borrowers in the first few months of 2023.Ratehub.ca data has found an uptick in interest in shorter-term fixed-rate mortgages from borrowers in the first few months of 2023.

Data and mortgage brokers find more people opting for shorter term locked-in rates in anticipation of a possible decline in interest rates.

By Srivindhya KolluruContributing Columnist

Sun., May 28, 20232 min. read

Borrowers are eager for a reprieve from surging monthly mortgage payments, the biggest contributor to mounting debt levels across Canadian households.

Equifax found Canadian borrowers paid an average of $1,460 a month as of the third quarter in 2022, an almost six per cent jump from the same time in 2022.

Experts say one solution could be opting for a shorter-term fixed-rate mortgage to wait out what some say could be a decline in rates next year.

Christopher Molder, principal broker at Tridac Mortgages, says a five-year fixed term is Canada’s most popular type and mortgage combination.

“But recently, up until the last six months, there’s been a major shift away from choosing five-year fixed rate money in favour of shorter-term money,” says Molder. “I had never, in my 15-year career, sold a three-year fixed rate mortgage — the five-year variable or five-year fixed has been by and large the most popular.”

“But now, since around last October, I don’t think I’ve sold a single five-year term mortgage,” says Molder.

Indeed, Ratehub.ca data found an uptick in interest in shorter-term fixed-rate mortgages — typically lasting one to four years — from borrowers in the first few months of 2023.

The idea, according to Molder, is borrowers who are locked in for five years today will have fear of missing out when everybody else is locked in at a lower rate. “If we expect interest rates to be lower, then that means you get to take advantage of a lower interest rate two years sooner than if you were locked into a five-year rate,” he says. “And we know there’s a good likelihood that interest rates will be lower in the medium term, or 12 to 18 months from now.”

But there are risks. The penalties for breaking a fixed-rate mortgage can be severe. Breaking a variable-rate mortgage comes with a penalty of three months of interest. But the penalty for breaking a fixed-rate term is either three months of interest or the interest rate differential, whichever is higher. (The interest rate differential is the difference between your current interest rate and the rate your lender could charge you today.)

Regardless of risk, Molder says our current market is funnelling the preference towards shorter-term fixed rates. While one- or two-year are generally more expensive, Molder says the sweet spot currently lies at a three-year term. “It’s just this confluence of factors that make it the most viable option,” Molder adds.

“I would recommend taking the risk and locking into a shorter-term fixed rate so that you have the chance of taking advantage of the lower interest rates should the interest rates go down,” says Luxy Shanmuganathan, a real estate agent with Forest Hill Real Estate Inc. Meanwhile, she says some borrowers are comfortable with their current rate and prefer the certainty that comes with a longer-term fixed rate.

Shanmuganathan emphasizes that no one — whether it be economists or your mortgage broker — cannot pinpoint exactly how where our economy is headed. “Choosing a term comes down to your risk tolerance and current situation.”

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