1, 3, or 5-year term: the renewal math for 2026

Direct answer. Compare mortgage terms across the same horizon, not by sticker rate. The break-even renewal rate is the long rate plus the rate gap times a multiplier: 0.25 for a 1-year, 1.5 for a 3-year, against a 5-year. Below that rate at renewal, the shorter term won; above it, the longer one did.

Every mortgage quote is really two decisions. There is the rate, which gets all the attention, and there is the term — how long you sign for — which usually gets settled by whichever number on the sheet is smallest.

The second decision is not a price decision. It is a decision about when you next face the market, and unlike the first one it can be worked out with arithmetic instead of instinct. The number that works it out is the break-even renewal rate.

A term is a contract length, not the life of the loan. When it ends, the remaining balance does not disappear. It gets renewed with the same lender or switched to a different one, at whatever rates exist on that date.

So a 1-year term re-exposes you to the market almost immediately. A 5-year pushes that exposure out and charges you for the delay. A 3-year splits the difference.

None of the three is better in the abstract. The question is which risk you would rather carry: the risk of renewing into a worse market, or the cost of paying for protection against a market that may never show up.

Put a 1-year, a 3-year and a 5-year rate side by side and the eye goes to the cheapest number. Thirty basis points below the 5-year reads as thirty basis points saved.

It isn't, because the three contracts do not cover the same span of time. Comparing them on sticker rate compares one year of certainty against five and calls the difference a discount.

The honest comparison holds the horizon fixed. Pick a length of time you actually care about — five years is the usual choice, because it is the longest commonly available fixed term — and price every path across all of it:

• Path A: one 5-year term. Fully priced, no unknowns.
• Path B: a 3-year term, then a 2-year renewal at a rate nobody knows yet.
• Path C: a 1-year term, then four more years at rates nobody knows yet.

Paths B and C have holes in them. The break-even renewal rate is the number that fills the hole and makes a path cost the same as Path A.

Set the declining balance aside for a moment and think in rate-years. Over a horizon H, a short term of length S at rate r_S, followed by the unknown rate X for the remainder:

H × (long rate) = S × r_S + (H − S) × X

Solve for X:

X = [ H × (long rate) − S × r_S ] ÷ (H − S)

If rates at renewal come in below X, the shorter path was cheaper. Above X, the longer one was.

Rearrange that and something non-obvious falls out. Call the gap between the long rate and the short rate g — how much cheaper the short term is today. Then:

X = (long rate) + g × S ÷ (H − S)

The break-even does not sit at the long rate plus the gap. It sits at the long rate plus the gap multiplied by a factor that depends entirely on how long you lock.

Against a five-year horizon:

• 1 year — multiplier 1 ÷ 4 = 0.25 → long rate + 0.25 × g
• 2 years — multiplier 2 ÷ 3 = 0.67 → long rate + 0.67 × g
• 3 years — multiplier 3 ÷ 2 = 1.5 → long rate + 1.5 × g
• 4 years — multiplier 4 ÷ 1 = 4.0 → long rate + 4.0 × g

The multiplier is the years you spend on the short term divided by the years left exposed afterward. It climbs steeply, and that is the whole shape of the decision: the longer your "short" term, the more violently a small rate gap gets amplified into a large break-even.

A 1-year term banks a small discount and leaves four years uncovered, so the market barely has to move against you before the saving is gone. A 4-year term banks the same discount for four years and leaves one year exposed, so rates would have to move enormously in that single year to undo it.

Illustrative only. Take a 5-year at 4.50%, a 3-year at 4.20%, a 1-year at 4.05%.

• 3-year: gap 0.30. Break-even = 4.50 + 1.5 × 0.30 = 4.95%. The 2-year rate three years out would have to exceed 4.95% before the 3-year path turns out worse.
• 1-year: gap 0.45. Break-even = 4.50 + 0.25 × 0.45 = 4.61%. The average rate across the following four years would have to exceed 4.61% — barely above today's 5-year — before the 1-year path turns out worse.

Those figures are placeholders chosen to make the arithmetic legible. They are not quotes, not current, and not a forecast. Run it with the rates actually in front of you.

The table makes the 1-year look forgiving. Its break-even sits closest to today's long rate, so rates have to move least to vindicate it.

Two things cut against that, and neither shows up in the formula.

X is an average, not a rate. For the 3-year path, X is a single renewal rate three years out. For the 1-year path, X is the average of four consecutive renewals. Averaging smooths — one bad year gets diluted by three others — which genuinely does reduce the chance of a catastrophic outcome. But it also means the comparison is no longer against one knowable event. It is against a four-year path, and the formula quietly assumes you will keep renewing on schedule with a lender willing to have you.

Four renewals is four sets of friction. Every renewal is a re-qualification decision — though OSFI no longer prescribes a minimum qualifying rate for uninsured straight switches at renewal where neither the balance nor the amortization increases — a potential switch, and possibly discharge, registration, legal and appraisal costs. Those attach to the short path and not to the long one. On a 1-year cycle over five years, that friction is incurred four times.

The arithmetic says the 1-year has the most forgiving break-even. It does not say the 1-year is the least work, the least uncertainty, or the least exposed to a lender's willingness to renew.

The rate-years version is a first approximation. Five things move the real answer, all in knowable directions.

The balance shrinks. Interest accrues on a declining principal, so a rate in years four and five applies to less money than the same rate in years one and two. The unknown rate lands on the smaller balance, which puts the true break-even slightly above what the formula returns. The shortcut is mildly conservative in favour of the long term.

Compounding. Canadian fixed-rate mortgages are conventionally compounded semi-annually, not in advance. The formula treats rates as simple annual figures. Over five years the distortion is small but real.

Paydown differs. At the same payment, a lower rate retires principal faster. Two paths that look equal on interest can leave different balances standing at the end of the horizon — and that balance is money.

Switching costs. Discharge, registration, legal and appraisal costs land on the short path, once per renewal.

The renewal term may not exist. The formula assumes you renew for exactly the remaining span. If what is available in three years is one-, three- and five-year terms, the tidy two-year comparison stops being tidy.

If you want the answer rather than the estimate:

1. Amortise Path A across the full horizon. Record total payments made and the balance remaining at the end.
2. Do the same for each short path, using a trial renewal rate.
3. For each path, add total payments + remaining balance. That sum is the true cost over the horizon — it captures interest and paydown together, which neither figure does alone.
4. Adjust the trial rate until the sums match. That rate is the break-even.

Add switching costs to the short paths before comparing. It is a spreadsheet exercise, and it takes about twenty minutes with your own balance, amortisation and payment frequency.

Sometimes the shorter term is the more expensive one. Lenders price each term against its matching point on the Government of Canada bond curve, and when shorter yields sit above longer ones, shorter fixed terms can price above longer ones too.

The formula still works — the gap goes negative and the break-even lands below today's long rate. Rates would have to fall meaningfully for the short path to come out ahead. Paying more for less certainty only works out if the market moves your way, which is worth seeing stated plainly before signing it.

Break a closed fixed mortgage early and the standard charge is the greater of three months' interest or the interest rate differential — with a statutory ceiling of three months' interest under section 10 of the Interest Act once a term longer than five years has run five years. Time remaining is a direct input to the IRD — so the longer the term you signed, the more term there is left to break, and the larger that figure tends to be.

A 5-year term is not only five years of rate certainty. It is also five years during which an unplanned move, a separation, a job relocation or a refinance is more expensive to execute than it would have been on a 1-year or a 3-year.

That cost never enters the break-even calculation, because the calculation assumes you hold every path to the end of the horizon. For anyone whose plans are genuinely settled, that assumption is fine. For anyone whose plans are not, it is the largest unmodelled term in the whole comparison.

For three years the dominant Canadian renewal story ran one direction: mortgages written at pandemic-era lows resetting sharply higher. That framing is now out of date.

CMHC reported in May 2026 that the renewal wave had peaked and that volumes would ease through the year, as the large cohort of 3- to 5-year mortgages originated at low rates in the early 2020s finished rolling over. TD Economics concluded in March 2026 that households had come through the adjustment — describing it as likely their last report on the subject — and projected that by the second half of 2026 the share renewing into lower rates would become the dominant outcome.

That does not mean renewal is painless. CMHC's same reporting noted delinquency rates edging up, driven particularly by Ontario and the Toronto area. But it does change the question being asked at the term-length decision. For three years the practical question was "how badly will this hurt." Increasingly it is "which direction am I betting on" — which is a question the break-even actually answers, and the narrative does not.

It cannot tell you where rates will be. Nobody can. What the break-even does is convert an unanswerable question into a sharper one: instead of what will rates do, it asks how far would rates have to move before this choice was wrong — and that question has a number attached to it.

It also cannot tell you what to sign. Rates available on any specific file depend on insured status, loan-to-value, property type, credit profile and lender. For advice on your own situation, talk to an independent licensed mortgage professional. This article is educational information about how the comparison works, not an offer of credit and not a recommendation.