Should you choose the 5 by 5 (5 ans fixe) mortgage strategy for the purchase of your home? This is a very common mortgage strategy, especially in Canada, though not in the rest of the world. It is so widespread that many Canadians think 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 5 by 5 (terme 5 ans fixe) strategy so common? Who knows? Maybe it's just a question of it's the way it's always been done. Plus, of course, this is the product that the big banks advertise all the time. You can bet if they are pushing this product, it is going to be better for them than it is for you.

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 5 by 5 strategy, such as
-obtainable at a wide range of banks
-lots of competition for your mortgage in this area
-your mortgage payment does not vary for five years
-it is a simple strategy
-there is no change in interest rate until the end of the period

But, of course, there are disadvantages
-when the five year term is over, you face a new, possibly higher interest rate.
-your mortgage payments may increase substantially every five years
-there are penalties for paying the loan off before the end of the five year period

Is there a case when the 5 by 5 strategy does pay?
Yes, if you think that interest rates taux hypothecaire - will be lower at the end of the five year period. However, the chances of interest rates being lower at the very time that you need to renew your loan would be very coincidental.

If you think interest rates are going to be higher when you need to renew, there is a better strategy for you to use, and that is the long term strategy. If you believe that rates will stay the same or even go lower, there is also a better approach for you and that is the variable strategy. If you are not sure whether rates will go up or come down, there is still another approach that will work. (Get in touch with us and we will tell you all about it.)

Perhaps by some chance you know that you will be changing residence in exactly five years, or you have exactly five years left on your home loan or you know that you will want to refinance in exactly five years, this strategy may be for you.

Make sure that you do not choose your home loan just because it is like everyone else's mortgage or because it is the only one your bank 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 - consultant who understands and can introduce the different choices to you.
It's your choice!