Updated: April 2025  |  bremo.io financial guides

5-Year Fixed Mortgage in Canada — Pros, Cons, Rates

The 5-year fixed mortgage is the single most popular mortgage product in Canada. Historically it has accounted for the majority of new mortgages. If you've heard someone talk about a Canadian mortgage, they were likely talking about a 5-year fixed. This guide explains exactly how it works, what the current rate environment looks like, and whether it's right for you.

What Is a 5-Year Fixed Mortgage?

A 5-year fixed mortgage locks in your interest rate for five years. Your payment amount is fixed for the entire term — it does not change regardless of what the Bank of Canada does with rates during that period. At the end of five years, you renew at whatever rates are available at that time.

The amortization (total repayment period) is separate from the term. Most Canadians choose a 25-year amortization, which means they'll renew roughly 5 times over the life of the mortgage if they keep 5-year terms each time.

Why 5 Years Became the Standard

The 5-year term became dominant in Canada for several reasons. The federal government's mortgage insurance rules historically favoured 5-year terms (posted rates for CMHC calculations use the 5-year benchmark). Five years also aligns with how many Canadians plan their lives — long enough for stability, short enough to revisit.

Pros of a 5-Year Fixed Mortgage

• Payment certainty: You know your exact monthly payment for five years. Budgeting is simple.
• Rate protection: If rates rise significantly during your term, your rate stays the same.
• Widely available: Every major Canadian lender offers it, creating competition that can drive rates down.
• Qualifying simplicity: Straightforward for lenders to underwrite and for borrowers to understand.
• Mental clarity: You don't need to track Bank of Canada announcements monthly.

Cons of a 5-Year Fixed Mortgage

• Higher rates: Fixed rates typically carry a premium over variable rates because the lender takes on the rate risk.
• Break penalties: If you need to exit the mortgage early, the penalty can be very large — often the Interest Rate Differential (IRD), which can run into tens of thousands of dollars at major banks.
• Misses rate drops: If rates fall significantly during your term, you're locked in at the higher rate with no benefit unless you break and pay the penalty.

How 5-Year Fixed Rates Are Set

Five-year fixed mortgage rates are primarily driven by 5-year Government of Canada bond yields. When investors demand higher yields on these bonds (typically during inflationary periods), mortgage rates rise. When yields fall, mortgage rates tend to follow — but not always immediately or proportionally.

Break Penalties: The Critical Detail

If you sell your home, refinance, or need to exit a 5-year fixed mortgage before the term ends, you face a prepayment penalty. At major banks, this is calculated using the Interest Rate Differential (IRD) method. The IRD compares your contract rate to the current rate for the remaining term and charges you the difference on the outstanding balance. In environments where rates have fallen since you locked in, this penalty can be extremely high.

Monoline lenders (lenders that only do mortgages, not retail banking) often have more borrower-friendly penalty calculations. Always ask how the penalty is calculated before you sign.

Stress Test on a 5-Year Fixed

When qualifying for a 5-year fixed mortgage, you must pass the mortgage stress test. You qualify at your contract rate plus 2%. On a 5-year fixed at 4.5%, you must qualify at 6.5%. This reduces the maximum mortgage you can carry relative to what you'd qualify for without the stress test.

Renewing a 5-Year Fixed

At the end of your 5-year term, you receive a renewal offer from your lender. You are not obligated to accept it. You can negotiate with your current lender or switch to a new one. Switching lenders at renewal requires a new stress test at the new lender, which is worth factoring into your renewal strategy.

Alternatives to Consider