Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.
Is your mortgage renewal coming up?
After several years of elevated interest rates and persistent inflation, choosing between a three- or five-year mortgage renewal is weighing on the minds of many homeowners, as even a small difference in your rate can translate into thousands of dollars spent or saved over the life of your mortgage.
The choice between a shorter and longer term ultimately comes down to balancing flexibility, stability, and your personal outlook on where rates could go next. Below, I’ll outline some of the trade-offs between three- and five-year mortgage renewals, so you can make a decision that fits your finances.
Why your mortgage term matters
Choosing between a three-year and a five-year mortgage term comes down to a number of variables, including:
- current interest rates;
- inflation;
- your current financial situation; and
- economic forecasts.
Interest rates have been historically elevated over the past few years, with some economists claiming that the economy is “on life support.”
In an effort to cool post-pandemic inflation, the Bank of Canada steadily increased its overnight rate between 2022 and 2024, surpassing 5 per cent in mid-2023 - a two-decade high.
Recently, the bank stated that it plans to pause the current rate at 2.25 per cent as inflation eases toward its 2 per cent target.
So how does all of this affect homeowners?
Opting for a shorter three-year term means you’ll renew sooner, potentially benefiting if rates continue to fall. Conversely, a five-year term locks in a rate for two years longer. While this helps provide certainty in your budget, you could miss out on savings if rates significantly fall after the three-year mark.
Pros and cons of 3-year mortgage renewals
A three-year mortgage term is more appealing to homeowners looking for flexibility, especially in a time where rates are frequently changing. Shorter terms often come with slightly lower interest rates than longer terms, which can reduce short-term borrowing costs.
If interest rates fall over the next few years, renewing sooner could allow you to secure a cheaper rate earlier than someone locked into a five-year contract.
A shorter term can also make sense for those expecting drastic life changes like moving to a new city, starting a family, switching homes, refinancing, or adjusting their long-term financial plans. The less time you’re locked into a mortgage contract, the fewer penalties you’ll face if you need to break the mortgage early.
The downside of a three-year term is that you’ll be exposed to more uncertainty. If rates rise again, you’ll face that reality sooner. Renewing more frequently increases your vulnerability to market swings, and even small rate increases can significantly raise monthly payments.
Pros and cons of 5-year mortgage renewals
Five-year mortgage terms are often chosen for their overall stability. Locking in your rate for a longer period protects you from short-term volatility and makes it easy to stay on track with your monthly budget.
This approach can be particularly attractive if you believe rates may stay elevated or rise again. By securing today’s lower rate, you’ll avoid the risk of potentially renewing into a more expensive market after just three years.
The trade-off, however, is flexibility. Longer terms sometimes carry slightly higher interest rates than shorter ones, which reflect the lender’s risk of committing for a longer period. Also, if rates fall significantly, borrowers locked into a five-year term may miss the chance to refinance at a lower rate without paying a penalty.
Negotiating the best rate
Renewal offers aren’t always fixed, and there may be wiggle room when it comes to the complete package. Prepayment privileges, penalties, amortization options, and payment flexibility are all valuable aspects of your mortgage contract that can ease your finances.
The first step is to shop around. Don’t rely solely on your current lender’s offer. Compare rates from other banks, credit unions, and mortgage brokers to understand so that you get a competitive view of the market. This is especially true if your credit score or length of credit history have improved in recent years.
Mortgage brokers can be especially helpful because they access multiple lenders at once and may get you access to lower rates that aren’t publicly advertised. If you receive a better offer elsewhere, your current lender may match or beat it to keep your business.
Final thoughts
At the end of the day, the right term is the one that best fits your current finances, your outlook of the economic future, and your major life plans over the next few years.
A three-year term offers flexibility and the chance to benefit from falling rates, while a five-year term provides stability and protection against future increases.
What matters most is to treat your upcoming renewal proactively. Shop around and compare offers, don’t be afraid to negotiate terms, and keep your broader financial goals in mind.
Read more from Christopher Liew:
