Why Big Banks Push 5-Year Fixed (Even When It’s Bad for You)

As a homeowner or a potential buyer, you’ve probably heard this before: "A 5-year fixed mortgage in Canada is the safest choice." Big banks love to promote this, but here’s the real question: Is it the best option for you?

I’ve spoken with many Canadians who thought a 5-year fixed mortgage was their only choice for stability. After all, the idea of a consistent monthly payment sounds like a dream.

In this blog, I will explain why banks love pushing the 5-year locked-in mortgage and why it’s not always the best deal for you. Also, I’ll offer some alternatives that might be a better fit for your needs in 2025.

What Is a 5-Year Fixed Mortgage?

Before moving further, let’s clarify what a 5-year fixed mortgage is.

A 5-year fixed mortgage means that for 5 years, your interest rate stays the same. No matter what happens in the market, you pay the same amount every month, which brings a sense of predictability.

You don’t have to worry about interest rates fluctuating and affecting your monthly payments.

It sounds pretty, right? 

Sure, it’s a great option if you want stability and peace of mind. But here’s the thing — it’s not always the best solution, especially in today’s market.

Quick Tip: Always look beyond the “safe” option. It’s easy to fall for the comfort of stability, but don’t ignore the bigger picture of your long-term financial goals.

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Why Banks Push It So Hard for a 5-Year Fixed Mortgage?

Banks love to promote the 5-year fixed-rate loan, but there’s more to it than just offering you a stable rate. A bank mortgage strategy offers fixed-rate loans to ensure steady profits. 

Here’s why big banks push the 5-year term mortgage so much:

1. Larger Profit Margins for Lenders

Banks make more money when they lock you into a 5-year mortgage. By choosing this longer term, they ensure a steady income for the next five years. 

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2. Early Payout Penalties Protect Bank Interests

Most people don’t know: 5-year fixed mortgages come with hefty early payout penalties. This is when you break the mortgage contract early, either because you sell your house, refinance, or even move for a job.

Banks love these penalties because they protect their profit. If you decide to leave your mortgage early, they charge you a significant penalty, ensuring they still make money from you.

Check out 5-year fixed rates to learn alternatives before committing to a long-term mortgage.

3. Sales Reps Earn More Commission

If you’ve ever talked to a bank representative, you know how eager they are to recommend the 5-year fixed mortgage. But did you know they might receive incentives to sell it to you?

Sales reps usually earn more commission for selling longer-term mortgages like the 5-year fixed, as these are more profitable for the bank.

So when they recommend this option, it might not be purely out of good intentions. They could be looking out for their bottom line.

When a 5-Year Fixed Mortgage in Canada Is Bad for You?

While a five-year fixed mortgage might seem like a safe bet, there are scenarios where it could be a bad decision for your wallet. Here’s when it could hurt you:

1. If Interest Rates Fall Within 2-3 Years

The big risk with Canada's 5-year fixed mortgage is locking in at a higher interest rate than the market offers. If interest rates fall after you lock in your rate, you’ll end up paying the higher amount for the next five years.

For example, let’s say you lock in a rate of 5.5% in 2023. By 2025, interest rates might drop to 3.9%, but you’ll remain stuck paying the 5.5%. This could cost you thousands of dollars in overpayments.

2. If You Break the Mortgage Early

Life happens. You might move to a new city for work, your family might get bigger, or you might want to refinance for a better rate.

If you break a 5-year fixed-term mortgage early, you'll have to pay a big penalty.

The bank designs this penalty to protect itself, not you. If you’re not sure you’ll stay in one place for five years, it’s a good idea to think about other options.

3. If You Qualify for Better Variable Offers

If interest rates are going to drop or are already low, a variable-rate mortgage might be a better choice for you. In this case, your interest rate might start lower than a fixed-rate mortgage, saving you money in the long run.

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Case Study Example: John’s Story

Let me tell you about John. He locked in a 5-year locked mortgage in 2023 at an interest rate of 5.5%. By 2025, interest rates had dropped to 3.9%. Now, John is stuck paying the higher 5.5% because he chose a 5-year fixed mortgage.

John’s situation perfectly shows how locking into a 5-year fixed repayment mortgage can hurt you if interest rates fall. He could have saved thousands of dollars by choosing a more flexible mortgage option.

What are the Better Alternatives in 2025?

Now that we’ve looked at the downsides, let’s talk about some better alternatives to the 5-year fixed mortgage in Canada.

1. 2- or 3-Year Fixed Terms

If you want the predictability of a fixed-rate mortgage but don’t want to commit to a 5-year term, consider a 2-year or 3-year fixed mortgage. These terms still offer stability but give you the option to reassess your situation sooner.

2. Adjustable or Variable-Rate Mortgages

If you’re comfortable with some flexibility, a variable-rate mortgage might be a good fit. With a variable mortgage, you could get a lower interest rate, and if interest rates drop, your payments will decrease too.

Quick Tip: When deciding between a variable vs fixed mortgage, consider your financial goals. A fixed mortgage offers stability, while a variable mortgage can save you money if rates drop.

3. Hybrid Mortgages

A hybrid mortgage allows you to combine both fixed and variable rates. For example, you could lock in part of your mortgage for a few years while leaving the rest to float with the market. This offers both stability and flexibility.

Conclusion: Is the 5-Year Fixed Mortgage Right for You?

In summary, a 5-year fixed mortgage isn’t always the best choice. While it offers stability and peace of mind, it can also lock you into a higher rate and penalize you if your life changes.

Speak to a mortgage broker in Toronto or elsewhere, explore your choices, and choose the option that best suits your long-term financial goals.

Remember, when seeking big bank advice for a mortgage, it's important to consider all your options. Take the time to consider all your options and make an informed decision.