The “5 By 5″ (Renew A Fixed Five Year Mortgage Five Times) Mortgage Strategy (Pret Hypothecaire)

The “5 by 5” (5 ans fixe - Renew a fixed five year mortgage five times) mortgage strategy is the most commonly employed strategy in Canada (but not in the rest of the developed world ).
a lot of people believe that all mortgages are modeled the same way (five year fixed term) and that their mortgage problem is limited to negotiating the best rate of interest.

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 because of 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 tells us, 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 asking what kind of mortgage you are looking for.

Are there advantages to the “5 by 5” mortgage strategy? Yes, there are certain advantages and they are:
• It is easily obtained at almost any lending institution
• There is a lot of competition for this type of loan
• Your payments will not change for 5 years
• It is an easy system to comprehend
• There will be no interest rate changes until the end of the five year period

Disadvantages

•At the maturity of the loan, you will have a new interest rate, and you have to renew at that rate
•The likelihood exists that you will have a major rise in home loan payments every five years
•If you want to pay your mortgage off before the maturity date, there will be stiff penalties

When to use the “5 by 5” strategy

Generally, it would be very rare that every time you renew your mortgage loan it would coincide with a time when interest rates were very low. If you could be sure that in five years, interest rates –taux hypothecaire - will not be higher than they are now, then it would be a great 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 steady or even go lower, there is a better strategy for that (see the variable strategy) and even if you are not sure whether rates will risego up or fall, there is a better strategy for that (contact us for that).

Perhaps by some chance you know that you will be moving in exactly five years, or you have exactly five years remaining on your mortgage or you know that you will want to refinance in precisely five years, this strategy may be for you.

Conclusion

Before choosing the same – hypotheque - home loan as the rest of the country, or the one that your bank wants you to pick, take the time to examine and to analysis all of the other strategies. Consult a mortgage consultant who really understands the different strategies, before you make your choice.

It’s an important choice!

Gregory is an Accredited Mortgage Professional (AMP). To get more information on