Mortgage term length: how the term you pick shapes your rate

Before you choose: two clocks, not one

Every mortgage runs on two clocks. The amortization is the long one: 25 or 30 years, say, the time it would take to pay off the loan at the current payment. The term is the short one: the period your rate, payment and conditions are fixed by contract. When the term ends you renew, switch lenders or pay off the balance, and a new term begins on whatever is still owed.

Choosing a term is really choosing how often you want to face that decision, and how long you want today's rate and conditions to bind you. A longer term gives more certainty about your payment; a shorter one gives you a sooner chance to change lenders or terms without a prepayment penalty. Our guide to amortization and your rate covers the long clock.

Short terms: under three years

One- and two-year fixed terms bring you back to the renewal table quickly. That suits households expecting to sell, refinance or receive a large sum soon, or who would rather not lock in for long. The trade-off is exposure: each renewal resets the rate on your remaining balance, and you cannot know in advance what rates will be.

Short-term rates can be priced above or below five-year rates depending on the market at the time, which is why comparing a one-year quote with a five-year average says little. The checker scores terms under three years against the Bank of Canada's effective rate on new fixed mortgages in that same bucket, moved by later changes in the matching Government of Canada yield.

Middle terms: three to under five years

Three- and four-year terms sit in their own benchmark bucket. An illustrative three-year quote of 4.39% gets a mark of 80 out of 100 ("grade B") against 4.14% (series: the lowest published rate for the same term and insurance class in Ontario). The gap of 0.25% above the benchmark is worth about $3,631 over the 3-year term.

Notice that the dollar figure covers three years, not five. A shorter term means a smaller dollar effect from any given gap, simply because the rate applies for less time, but it also means you will be shopping again sooner.

Five years: the common reference point

The five-year fixed is the rate most often quoted in headlines, and the Bank of Canada's effective-rate series for terms of five years and over is the yardstick for it. An illustrative five-year quote of 4.59% gets a mark of 80 ("grade B") against 4.34%, worth about $5,985 over the 5-year term.

Whatever term you pick, the balance you renew at depends on how long the term runs. The table follows $500,000 at an illustrative 4.49% year by year. After five years about $438,909 is still owing, after $104,784 of interest has been paid. A two-year term would put you back at the renewal table with the year-two balance instead.

Longer than five years

Seven- and ten-year fixed terms buy a longer stretch of certainty. The checker scores them against the same five-years-and-over bucket as five-year terms, so a seven-year quote is compared with an average that includes five-year lending.

There is one legal protection specific to long terms. Under section 10 of the Interest Act, for an individual's mortgage with a term longer than five years, the borrower can repay after five years with three months' further interest. Before five years, the usual prepayment penalty rules in your contract apply. If you are weighing a long term, ask how the penalty would be calculated in years one to five, because that is the period when breaking would cost the most.

At the end of every term: renewal

A federally regulated lender, such as a bank, must send a renewal statement at least 21 days before the end of your term, or tell you 21 days before the end of the term if it won't renew. The statement shows the balance at renewal, the rate, payment frequency, term and any charges, and must say the rate offered won't increase until the renewal date. If the lender plans to renew automatically, the statement says so.

Twenty-one days is a short window to compare offers, so it helps to start much earlier. The renewal timeline and the renewal checklist lay out what to do and when, and the renewal checker scores an offer the moment you receive it.

1. Note your term's end date and put a reminder several months ahead of it.
2. Decide what term fits your next few years before you look at rates.
3. Grade the renewal offer and at least one competing quote for the same term.
4. Compare switching costs with the dollar value of any rate gap using the renewal switch calculator.