Fixed mortgage rates are rising – is it time to consider a three-year term?

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If you’re mortgage shopping now, you’re likely not feeling spoiled for choice.

Fixed mortgage rates have risen steadily since early March, as bond investors – wary of the effect the war in Iran is having on inflation and central bank rates – have pushed yields higher.

Because these yields are used as a guide by Canadian lenders when setting their fixed-rate product pricing, they’ve responded by raising fixed mortgage rates. These price increases have ranged from 25 to 40 basis points, depending on the bank and mortgage product. (There are 100 basis points in a percentage point.)

As a result, the lowest five-year insured mortgage rate in Canada – available to borrowers who are putting less than a 20-per-cent down payment on their home – is 4.04 per cent. Uninsured mortgage rates, which apply to anyone putting more than 20 per cent down, are 15 basis points higher, at a low of 4.19 per cent.

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Keep in mind that these are the lowest rates available and generally only for borrowers with the strongest of credit scores. Five-year rates in the middle of the pricing pack can be upwards of 5 per cent.

Meanwhile, variable rates – while currently stable and priced at a comparable low of 3.35 per cent – could likely rise by early 2027. This is according to the Q1 Market Participants Survey, released by the Bank of Canada on May 11.

The survey, which polls 28 financial market participants on their sentiments around the economy, finds that the 75th percentile of respondents are expecting the central bank to increase its benchmark rate by 50 basis points next year, bringing it to 2.75 per cent from the current 2.25 per cent. Assuming lenders adjust their prime rates to match, the five-year variable rate would then rise to 3.85 per cent.

However, the above assumes the Iran war will have ended and inflation will have chilled by the end of next year. A different outcome could force the central bank to increase rates by more than what is currently expected.

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So, where does this leave borrowers? Should you lock in for five years at a fixed term priced above 4 per cent? Or should you gamble with a variable rate and reap those savings in the short term?

For many borrowers who need predictability in their monthly mortgage payments, a temporarily lower rate often isn’t worth the stress of having to keep an eye on the market.

A common middle ground is to take out a shorter fixed rate, such as a two- or three-year term. This can be a savvy move when five-year terms are unattractive, since it lets borrowers change their mortgage several years sooner, on the hope that rates have dropped by then.

This would also allow borrowers avoid breaking a longer mortgage midterm – and pay the hefty interest rate differential penalty charged by banks for doing so.

Three-year terms in particular are more popular when all interest rates are high; lenders often price them competitively at these times to be on par or slightly lower than their five-year counterparts, to appease customers who don’t want the longer-term commitment.

We last saw this play out in the summer of 2024. Five-year fixed rates were also in the high fours at the time, and variable rates were ensnared above the 5-per-cent mark, following the tail end of the central bank’s cycle of 10 rate hikes and subsequent rate hold.

Lenders slashed their three-year pricing to undercut five-year terms, and on Ratehub.ca, we saw demand for these rates grow, rising from 5 per cent of all inquiries in January, 2024, to 11 per cent by August. While still a small share of the market, it reflects how borrowers crave flexibility when interest rates are high.

Now, our brokerage is seeing signs that demand for three-year terms is heating up again. Customers have been increasingly keen to explore shorter options, and lenders have started to offer lower three-year pricing. The lowest three-year term remains slightly higher than the five-year at 4.09 per cent – but this is a space for rate-savvy shoppers to watch.

As always, it’s a great idea to take out a rate hold to secure access today’s rate pricing, especially if you’re a few months away from choosing your rate. Most lenders will let you hold this rate for up to 120 days. It’s a good way to hedge your bets while seeing if more discounts are in store.

Penelope Graham is the head of content at Ratehub.ca