The “5 x 5” home loan strategy (hypotheque) - (Renew 5 year fixed loan 5 times)

Why the “5 by 5” (5 ans fixe) mortgage strategy (renewing a fixed rated five year mortgage five times)?
This strategy is a widespread mortgage strategy, probably the most common in Canada, though not in the rest of the developed world.
The fact is many people believe 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 this strategy (terme 5 ans fixe) so popular? It’s hard to say; but perhaps because it is the same strategy that we are accustomed to and that our parents and everyone else we know has. In addition, the big lenders advertise this strategy the most, probably because it is the most beneficial for them. You can be sure if it is advantageous for them it is not advantageous for you!

Description

As the name tells us this strategy involves mortgaging a home with a five year fixed mortgage loan and subsequently renewing it for the same term at the expiration of each loan, that is to say, every five years.

Visit any financial institution or call any broker and if you ask them for the best rate, they will routinely give you the five year fixed rate as if it were clear 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 just about any lending institution
• There is a great deal of competition for this type of business
• Your payments will not vary for 5 years
• It is an easy strategy to comprehend
• There will be no interest rate changes 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, most likely higher interest rate.
-your mortgage payments may increase considerably every five years
-there are fees for paying the loan off before the end of the five year period

So, should you ever use the “5 by 5” strategy?
Yes, if for some reason, you think that interest rates would be lower at the end of your five year loan period, but the chances of interest rates – taux hypothecaire - being lower just at the point when you need to renew would be very rare.

But if you think that rates during the next 5 to 10 years will be higher, there is a better system to use (see the long term strategy) and if you believe that rates will remain steady or even be lower, there is a better system for that (see the variable strategy) and even if you are not sure whether rates will rise\go up or fall, there is a better strategy for that (contact us for that).

If you know for a fact that you will be moving in exactly five years, or if you know you want to refinance your homein exactly five years, or if only five years are left on on your loan, the “5 by 5” strategy may be the one 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 look at all of the home loan options available to you, and that you work with a mortgage – hypotheque - broker who understands and can introduce the different choices to you.
It’s your choice!

Gregory writes articles for http://www.informezvous.com/ - Pret hypothecaire. To have more information about mortgages, please visit one of his websites:

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