Choosing a Mortgage Term: One, Three or Five Years?

Your mortgage term decides how long your rate and conditions are locked in, and when you next have to renew. Here is how one, three and five-year terms compare, what a shorter or longer term means for penalties and flexibility, and how to match your term to your plans.

The short version

Term and amortization are different things

The term is the time your mortgage contract is in effect. The amortization is the time it takes to pay off the mortgage. A mortgage with a 25-year amortization and five-year terms would normally go through four renewals before it is paid off, and every time you renew, you renegotiate your rate.

At the end of each term, you renew, switch lenders or pay off the balance, and you can pay off a closed mortgage at the end of its term without a prepayment charge. The term is separate from the rate type: a fixed rate stays the same for the whole term, while a variable rate can change during it. I compare the two in Fixed or Variable?

The terms lenders offer

• Closed fixed terms. TD offers 6 months, 1, 2, 3, 4, 5, 6, 7 or 10 years, and RBC 1 to 5, 7 and 10 years. CIBC says its terms range from 6 months to 10 years.
• Variable terms. At RBC and TD, variable rates come with a five-year term.
• Open terms. You can pay off any amount at any time without a charge, at a higher rate. Fixed open terms are short, such as RBC's six-month and one-year terms, and RBC and TD also offer a five-year open variable rate.
• Convertible terms. A short closed term that you can convert to a longer closed term without a prepayment charge, such as the six-month convertible at RBC and TD.

Scotiabank says most people choose three to five-year terms, and CIBC says four to five-year terms are the most common. CMHC reported that in July 2024, fixed-rate terms of three to less than five years made up more than half of the new mortgages extended by the chartered banks.

Shorter or longer: the trade-offs

The Financial Consumer Agency of Canada (FCAC) puts it simply: with a shorter term, you renew sooner, and with a longer term, you keep the conditions of your contract for longer. Lenders usually offer lower rates for shorter terms and higher rates for longer ones.

• Five years. The appeal is a predictable payment for longer and fewer renewals to manage.
• One to three years. Often a lower rate, an earlier chance to change direction, and less time left on the term if you need to break it. FCAC suggests a shorter term may be better if you plan on moving soon.
• Seven or ten years. Your payment is set for longer, usually at a higher rate. Under the Interest Act, once five years have passed on a term longer than five years, you can pay off the mortgage with no more than three months' interest as a penalty. BMO and Scotiabank say the same in their prepayment guides. The rule doesn't apply when the borrower is a corporation.

The rate gap and the renewal question

Shorter terms don't always cost less. From mid-2023 until April 2025, the chartered banks' typical posted one-year rate was higher than their posted five-year rate, according to Bank of Canada data. So compare the rates you are actually offered, and think about what could happen when a shorter term ends.

Here is an example with a $500,000 mortgage, a 25-year amortization, and example rates of 4.2% for three years or 4.5% for five, compounded semi-annually:

• The first three years. The three-year term's payment is $2,684.59 a month, about $83 less than $2,767.36 on the five-year term, and you pay about $4,360 less interest.
• The last two years. Over the full five years, the three-year choice comes out ahead if you can renew for the remaining two years at about 5.0% or less. At 6.2%, your payment would rise by about $516 a month and you would pay about $10,800 more interest than with the five-year term. At 3.2%, your payment would fall by about $241 and you would pay about $16,200 less.

Nobody knows where rates will be when your term ends, so a useful question is how big a payment increase your budget could handle at renewal. For more on how rates affect your payments, see Understanding Interest Rates.

Penalties and flexibility

If you break a closed fixed term, the penalty is usually the greater of three months' interest and the interest rate differential (IRD), which depends on the months left in your term. With $450,000 owing at an example 4.5% and an example comparison rate of 3.5%, using a simplified calculation (the balance times the rate gap times the years left):

• With 36 months left, the IRD is about $13,500, well above three months' interest of about $5,063.
• With 12 months left, the IRD is about $4,500, so the penalty is three months' interest, about $5,063.

That is one reason a shorter term can suit you if a move is possible. Other ways to build in flexibility:

• An open term, if you plan to sell or pay off the mortgage soon, as FCAC suggests, accepting a higher rate.
• A convertible term, if you want a short term now with the option to lock in a longer one later.
• A portable mortgage, which lets you transfer your mortgage to your next home. Check with your lender whether yours is eligible.
• Prepayment privileges, which vary from lender to lender and let you pay down part of the balance without a penalty.

Matching the term to your plans

FCAC suggests thinking about the future impact of your mortgage choices, which can help you avoid a penalty later. A term that ends around the time you expect a change often works best.

• A possible move. If you might sell in about three years, a three-year term ends around then, and you can pay off a closed mortgage at the end of its term without a charge.
• Changes in income or family. A parental leave, a new job or retirement can make a steady payment more valuable, or make it matter more when your renewal falls.
• Renewal timing. A federally regulated lender must send your renewal statement at least 21 days before your term ends, and RBC and TD let you renew up to 120 days early without a penalty. I explain what to do then in Renewing Your Mortgage.

The stress test and your term

To get a mortgage from a bank, you must qualify at the higher of 5.25% or your contract rate plus 2%, for insured and uninsured mortgages. Because the test uses your contract rate, your choice of term can change it: at an example rate of 4.2%, you would qualify at 6.2%, and at 4.5%, at 6.5%. When your rate plus 2% is below 5.25%, the floor applies instead.

At renewal, you can move an uninsured mortgage to another federally regulated lender without the stress test, as long as you don't increase your balance or amortization, and insured mortgage holders can also switch lenders at renewal without requalifying under the stress test. The new lender still has to approve your application. I explain how lenders work out what you can borrow in How Much House Can You Afford?

Questions buyers often ask me

What is the difference between a mortgage term and an amortization?

The term is how long your contract and rate last, often five years. The amortization is how long it takes to pay off the whole mortgage, often 25 years, so you renew several times along the way.

Which mortgage term is most common?

Three to five years. Scotiabank says most people choose three to five-year terms, and CIBC says four to five-year terms are the most common.

Is a shorter term always cheaper?

No. Lenders usually charge less for shorter terms, but from mid-2023 until April 2025 the chartered banks' typical posted one-year rate was above their posted five-year rate. A shorter term also means renewing sooner, at rates no one can predict.

What happens if I break a ten-year mortgage after five years?

Under the Interest Act, once five years have passed, you can pay off the mortgage with no more than three months' interest as a penalty. The rule doesn't apply when the borrower is a corporation.

What is a convertible mortgage?

A short closed term, such as six months, that you can convert to a longer closed term without a prepayment charge. RBC and TD both offer a six-month convertible term.

Getting ready to buy? Read why mortgage pre-approval matters or try my mortgage calculator to compare payments at different rates.

This article is general information, not financial advice. The examples use example rates, compounded semi-annually, that stay the same for each term, and a simplified penalty calculation; they are illustrations, not quotes. Lender terms are from their websites at the time of writing. For FCAC's guide, see mortgage terms and amortization.