Should you choose the  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 common 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  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 benefit).
(NOTE: if it is more expensive for us, it is more profitable for the banks!)

Description

So what is this popular strategy? As the name says, it is the method by which you take out a five year fixed rate home loan 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  by 5strategy, such as
- obtainable at a many lending institutions
- lots of competition for your mortgage in this area
- your home loan payment does not vary for five years
- it is a simple strategy
- there is no change in interest rate until the end of the term

Disadvantages

At the maturity of the loan, you face a new current rate, and you have to renew at that rate
The possibility exists that you will have a major increase in mortgage payments every five years
 If you want to pay your mortgage down before the maturity date, there are stiff penalties

When to use the  by 5strategy

Generally, it would be very rare that every time you renew your home loan it would coincide with a time when interest rates were very low. If you could be certain that in five years, mortgage rates –taux hypothecaire - will not be higher than they are now, then it would be a good idea.

But if you think that rates during the next 5 to 10 years will be higher, there is a better strategy (see the long term strategy) and if you believe that rates will remain stable or even go lower, there is a better system for that (see the variable strategy) and even if you are not sure whether rates will rise\go up or fall, there is a better strategy for that (contact us for any information).

If you know for sure that you will be moving in exactly five years, or if you know you want to refinance your housein exactly five years, or if only five years remain on your loan, the  by 5 strategy may be the one for you.

Make sure that you do not choose your mortgage just because it is like everyone else mortgage or because it is the only one your lender makes available to you. Make sure you examine all of the home loan options available to you, and that you work with a mortgage  hypotheque - broker who understands and can introduce the different choices to you.
It's your choice!