Is the 5-year fixed mortgage dead?

Not long ago, the standard issue five-year fixed was Canada’s mortgage term of choice. It sold more than any other term by a long-shot.

Then came COVID-19. Suddenly, floating rates were diving below fixed rates, and borrowers were boarding the variable train.

That train got derailed as prime rates spiked 475 basis points in 17 months, but five-year fixed adoption has yet to return to the glory days of 2020-2021 — back when mortgage rates started with a “1.”

Times have turned. Nowadays, fewer than one in seven mortgagors opts for a five-year fixed, according to the latest numbers from Statistics Canada. And there’s a quintet of reasons for that:

1. For most, even the lowest nationally advertised five-year fixed rates — 4.64 per cent (insured) and 4.99 per cent (uninsured) — “feel” too high to lock into long-term.

2. Economists’ forecasts and Bank of Canada guidance have borrowers concluding that rates have peaked, so folks want to ride rates down with a variable or shorter term.

3. Three-year fixed rates have become the Goldilocks of mortgages, offering protection if inflation flares back up and a shorter term for borrowers who want to reset their rate when the prime rate drops — all for not much more than a five-year term.

4. History shows that roughly four out of five times five-year fixed rates underperform variables and short-term fixed rates — depending on what backtesting assumptions are used.

5. Prepayment penalties on five-year terms are painful, and due to how penalties are calculated, they’ll increase as short-term fixed rates drop.

Consequently, five-year fixed rates will remain unpopular for many moons.

But fivers haven’t lost all their fans. Mortgage hunters are still signing up for mortgages that mature in