Home loan Strategy – The “5 by 5” strategy (renew 5 times a 5 years fixed mortgage prêt hypothecaire)

Should you choose the “5 by 5” (5 ans fixe) mortgage strategy when you purchase your home? This is a very common mortgage strategy, especially in Canada, though not in the rest of the world. It is so widespread that many Canadians believe 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 mortgage.

Why is the “5 by 5” (terme 5 ans fixe) strategy so common? I imagine it is probably because it has been the most customary (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

As the name tells us this strategy involves mortgaging a property with a five year fixed mortgage loan and subsequently renewing it for the same term at the expiration of each loan, in other words, every five years.

Go into any bank or call any broker and if you ask them for the best rate, they will routinely give you the five year fixed rate as if it were clear that you wanted the five year fixed rate.

There are some advantages to the “5 by 5” strategy, such as -obtainable at a wide range of banks -lots of competition for your mortgage in this area -your mortgage payment does not vary for five years -it is a simple strategy -there is no change in interest rate until the end of the period

And, of course, there are disadvantages -when the five year term is over, you face a new, most likely higher interest rate. -your mortgage payments may increase substantially every five years -there are fees for paying the loan off before the end of the five year term

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 believe that interest rates will be higher at the end of the five year term of your loan, the strategy you should choose is the long term strategy. If you believe that rates will be stable, or go lower, you should choose the variable rate strategy. And, if you are like most borrowers and are not sure which way interest rates will head, there is a strategy for you as well. (Get in touch with us and we can discuss it with you.)

If you know for a fact that you will be moving in exactly five years, or if you know you want to refinance your homein exactly five years, or if only five years are left on on your loan, the “5 by 5” strategy may be the one for you.

Conclusion

Before choosing the same – hypotheque - home loan as everyone else, or the one that your lender wants you to choose, take the time to examine and to understand all of the other strategies. Consult a mortgage consultant who really understands the different strategies, and then make your choice.

It’s an important choice!

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