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A fixed-rate mortgage is one of the most popular types of mortgages in Canada. A fixed-rate implies the interest is fixed and will not change for the entire loan term. A 1-year fixed-rate mortgage suits individuals who enjoy predictability and consistency in their budget management.
The below guide will help you understand the ins and outs of a 1-year fixed-rate mortgage in Canada. The hope is that by the time you finish this guide, you should be able to decide if a 1-year fixed-rate mortgage is right for you and how to select the right 1-year term mortgage from the universe of 1-year fixed-rate mortgages in Canada.
A 1-year fixed-rate mortgage is a loan product that allows you to pay a predictable monthly payment for the entire 1-year term of the mortgage contract.
A mortgage term is the length of time your mortgage is in effect with a specific lender. Other mortgage terms are two years, four years, and five years.
Mortgage rates from a specific lender will be priced differently for each term. Generally, the mortgage rate for a 1-year fixed-rate term will differ from the interest rate offered for a two-year, fixed-rate term or a 5-year fixed-rate term mortgage.
The good thing about a 1-year fixed-rate mortgage is its consistent and predictable mortgage payment.
That means your monthly payment will remain the same throughout the 1-year term of the mortgage, even if the market mortgage goes up or down.
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The primary characteristic of a one-year fixed-rate mortgage is that the interest rate is locked in for the entire loan period.
Unlike a variable-rate mortgage, the rate for your one-year fixed-rate mortgage is not attached to a benchmark rate. Thus, it is not susceptible to conditions like the Bank of Canada’s prime rate, inflation, and the housing market.
You will know exactly how much your monthly mortgage payment will be at the start of the mortgage term, how much interest expense you will have over the one year and your mortgage balance at the end.
The expense certainty of this form of mortgage term makes it an excellent choice for budget-conscious borrowers. You will know exactly how much you will spend each month in mortgage payments for the entire 1-year period and how much you will own on your mortgage balance at the end of the term.
You will likely be penalized if you choose to break your mortgage term early. Suppose you wish to pay above your prepayment privilege or pay off the entire loan before the end of the one year.
It is worth comparing a one-year fixed-rate mortgage to a five-year one since most Canadians prefer a five-year term mortgage. Let’s see which mortgage term option is better for you.
When deciding between a 1-year fixed-rate mortgage, you should consider several factors in a 5-year fixed-rate mortgage. The below factors should be your starting point.
You should consider a 1-year fixed-rate mortgage if:
You should consider a 5-year fixed-rate mortgage if:
A 1-year fixed-rate mortgage will be right for you if:
A 1-year fixed-rate mortgage is not suitable for you if:
All mortgage loans in Canada are offered for a specified period. In the case of a 1-year fixed-rate mortgage, your mortgage contract with the lender expires after the 1-year term.
You can either choose to renew your mortgage with the existing lender or move it to another lender.
Mortgage renewal is an opportunity to renegotiate the conditions of your contract at the end of the term without increasing your loan amount or extending your amortization.
You can renew your mortgage with your existing lender or switch it to a new one.
To renew your mortgage, you need to be covered by one of Canada’s default insurance providers, such as CMHC, Sangen, or Canada Guaranty.
The mortgage renewal process involves transferring your default insurance coverage to the new mortgage loan.
If you choose to move your mortgage to a new lender for renewal after your 1-year term, the new lender will require you to provide the name of the default insurance provider and your default insurance account number.
Mortgage refinancing can be the route to take if you want to cash out on the equity in the property or extend the amortization term.
Mortgage refinancing is replacing your existing mortgage with a new one with different conditions.
Cashing out on the property’s equity can help you consolidate debts, invest in other assets, or pay your children’s tuition. Mortgage refinance requires you to apply and qualify for a new higher loan amount.
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