Should you choose the “5 by 5” (5 ans fixe) 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 think it is the only type of home loan that is available, and that they are restricted 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 traditional (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 the consumer, it is more profitable for the banks!)
Description
So what is this popular strategy? As the name tells us, it is the method by which you take out a five year fixed rate mortgage and then when that mortgage comes due, you renew with another five year fixed term mortgage. If you ask a bank about interest rates, they will give you the five year fixed term rate, without even nquiring about what kind of mortgage you are looking for.
There are some advantages to the “5 by 5” strategy, such as
-obtainable at a many banks
-lots of competition for your mortgage in this area
-your home loan payment does not change for five years
-it is a simple strategy
-there is no change in interest rate until the end of the 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 increase in your mortgage payments every five years
• You will face fees if you pay the loan off earlier than the maturity date.
Is there a time when the “5 by 5” strategy does pay?
Yes, if you think that interest rates – taux hypothecaire - will be lower at the end of the five year period. However, the chances of interest rates being lower at the very time that you need to renew your loan would be a big coincidence.
If you think interest rates are going to be higher when you need to renew, there is a better strategy for you to use, and that is the long term strategy. If you believe that rates will stay 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 approach that will work. (Get in touch with us and we will tell you all about it.)
Perhaps by some chance you know that you will be moving in exactly five years, or you have exactly five years remaining on your mortgage or you know that you will want to refinance in exactly five years, this strategy may be for you.
What deductions can we draw from this? You must look at every mortgage strategy that is around, and not just the one that everyone else has, or the one that your bank wants you to take. The best way to do this is to talk to 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 an important choice it is!
