Why the ?5 by 5? (5 ans fixe) mortgage strategy (renewing a fixed rated five year mortgage five times)?



This strategy is a common mortgage strategy, even the most common in Canada, though not in the rest of the developed world.

As a matter of fact, many people think that this is the way all mortgages are structured, and that the only choice they have in a mortgage is to try to get the best interest rate.

Why is the ?5 by 5? (terme 5 ans fixe) strategy so common? Who knows? Maybe it's just a matter of ?it's the way it's always been done.? In addition, 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 more lucrative for them than it is for you.

Description

As the name tells us this strategy consists of mortgaging a property with a five year fixed mortgage loan and subsequently renewing it for the same term at the expiration of each loan, in other words, every five years.

Go into any financial institution or call any broker and if you ask them for the best rate, they will automatically give you the five year fixed rate as if it were evident that you wanted the five year fixed rate.

Are there advantages to the ?5 by 5? mortgage strategy? Yes, there are certain advantages such as:

? It is easily obtained at almost any bank

? There is a great deal of competition for this type of business

? Your payments will not vary for 5 years

? It is an easy system to understand

? There will be no interest rate adjustments until the end of the five year term

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 term

So, is there ever a time to use the ?5 by 5? strategy?

Yes, if for some reason, you believe that interest rates would be lower at the end of your five year loan period, however, the chances of interest rates ? taux hypothecaire - being lower just at the point when you need to renew would be very rare.

If you believe that interest rates will be higher at the end of the five year term of your loan, the strategy you should choose is the long term strategy. If you believe that rates will be stable, or go lower, you should choose the variable rate strategy. And, if you are like most borrowers and are not sure which way interest rates will head, there is a strategy for you as well. (Get in touch with us and we can discuss it with you.)

Perhaps by some chance you know that you will be moving 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.

What deductions can we draw from this? You must examine every mortgage strategy that is available, and not just the one that everyone else has, or the one that your bank wants you to take. The best way to do this is to consult with a mortgage broker who is an expert in all of these types of ? hypotheque - mortgage strategies and can show you all of the choices.

What an important choice it is!