The financial markets have shifted because the Canadian government yield curve moved upward following geopolitical uncertainty from the Iran war. The market is now betting that borrowing costs will stay higher for longer, with both wholesale and retail forecast curves projecting steady rate increases over the next five years. This makes locking into a 5-year fixed today mathematically advantageous if you hold the term.
According to the retail forecast curves discussed, the 5-year fixed rate is sitting around 4.29% today and is projected to climb to 5.39% in five years. The 5-year variable rate is currently around 3.7% and is projected to increase to 4.65% over the same period.
A 5-year fixed mortgage can become an expensive trap if you break the term early. If you plan to sell your home, refinance to pull out capital, or complete a major renovation that requires touching the mortgage before the five years are up, you could face an Interest Rate Differential penalty in the tens of thousands of dollars.
An IRD penalty is a charge you incur if you break a fixed-rate mortgage term before it matures. Dalia explains that this penalty can cost tens of thousands of dollars and completely wipe out any savings you earned by choosing the lower fixed rate. If you plan to sell, refinance, or renovate during your term, choosing a variable or shorter-term fixed rate is the safer choice because it significantly reduces your breakage penalty.
