Variable Rate Mortgage Rates
When you're looking to buy a home or refinance your mortgage, one of the key decisions you'll face is whether to choose a fixed rate or a variable rate mortgage. While fixed rate mortgages offer predictability, variable rate mortgages can offer greater savings—if you're comfortable with some risk. In Canada, variable rate mortgages are a popular option, especially when interest rates are stable or trending downward.
This article will take you through everything you need to know about variable rate mortgages. We'll cover how they work, what factors influence variable rates, how they compare to fixed mortgages, how to qualify for the best rates, and what risks to watch out for. By the end, you'll have a clear understanding of whether a variable rate mortgage is the right choice for you.
What Is a Variable Rate Mortgage?
A variable rate mortgage is a home loan where the interest rate can change over time. Instead of staying locked in for the whole term like a fixed rate, your variable rate mortgage follows your lender's prime rate. This prime rate is closely tied to the Bank of Canada's key policy interest rate, which goes up or down based on how the economy is doing.
When the Bank of Canada raises its policy rate, lenders usually raise their prime rate too. When the Bank lowers its rate, lenders often pass those savings on to you. As a result, the amount of interest you pay on your mortgage can go up or down throughout your term.
There are two main types of variable rate mortgages in Canada:
- Adjustable Rate Mortgages (ARM): Your payment amount changes when the interest rate changes. If rates go up, your payment increases. If rates go down, your payment decreases.
- Variable Rate Mortgages with Fixed Payments: Your monthly payment stays the same, but the amount of principal versus interest changes. When rates rise, more of your payment goes toward interest and less toward principal, which can extend your amortization period.
Lenders will tell you which type they're offering. It's important to understand how your payments will respond to rate changes so you can plan your budget.
What Affects Variable Mortgage Rates in Canada?
Variable mortgage rates are influenced mainly by the Bank of Canada's overnight lending rate. When inflation is high, the Bank often raises rates to slow down spending. When the economy is weak, the Bank may lower rates to help people borrow and spend more.
Lenders also consider their own business needs when setting their prime rate. Although most major banks in Canada tend to follow the Bank of Canada's lead, there can be small differences in how quickly or by how much they adjust their rates.
Your personal financial profile also affects the rate you're offered. Lenders will look at your credit score, income stability, the size of your down payment, and your overall debt levels. A borrower with excellent credit and a low loan-to-value ratio (meaning a large down payment) is more likely to be offered a better rate than someone with a higher risk profile.
Variable Rate vs. Fixed Rate Mortgages
Choosing between a variable and fixed rate mortgage depends on your financial situation, your goals, and your comfort with risk. Here's how they stack up:
Variable rate mortgages tend to start with a lower interest rate compared to fixed rate mortgages. This means your initial monthly payments may be lower, and you might save money over time if rates stay the same or go down. In fact, over the past few decades, many Canadians with variable rate mortgages have paid less interest than those with fixed rates.
However, variable rates come with uncertainty. If interest rates go up, your payments could rise or you might pay more interest, especially if you have a fixed-payment variable mortgage. This unpredictability can be hard to manage if you're on a tight budget.
Fixed rate mortgages, on the other hand, give you stability. Your rate and payment won’t change for the length of your term, which is helpful if you want to plan your finances with confidence.
Variable might be the better choice if:
- You believe interest rates will stay the same or go down.
- You have enough room in your budget to handle a payment increase.
- You want to take advantage of lower upfront costs.
Fixed might be the better choice if:
- You want payment stability and don’t want to worry about market changes.
- You expect interest rates to rise.
- You’re buying your first home and prefer predictability.
Today’s Best 5-Year Variable Mortgage Rates
The 5-year variable rate mortgage is one of the most common choices in Canada. It offers a balance between lower starting rates and a longer term, which means fewer renewals and less paperwork.
You’ll often see lenders advertise their variable rates as \"prime minus\" offers. For example, a rate might be listed as \"Prime - 0.90%.\" If the lender's prime rate is 7.20%, your effective rate would be 6.30%. The exact discount off the prime rate can vary depending on your financial profile and the lender’s promotions.
Keep in mind that the rate you see advertised may not be the one you qualify for. The best rates are usually reserved for borrowers with strong credit, low debt, and a significant down payment. Shopping around and using a mortgage broker can help you access lower rates.
How to Qualify for the Best Variable Rate
Lenders look closely at your finances before offering their best mortgage rates. To qualify for the lowest possible variable rate, you'll need to show that you are a responsible, low-risk borrower.
Your credit score is key. Most lenders want to see a score of at least 680, but a score over 740 can unlock even better offers. If your credit is lower, consider paying off outstanding debts and avoiding new credit applications before you apply.
Stable employment and income are also important. Lenders like to see at least two years of steady work, especially if you’re salaried. If you’re self-employed, you may need to provide tax returns and other documents to show your income is reliable.
Your down payment size matters too. A larger down payment lowers your loan-to-value ratio, which makes you less risky in the eyes of the lender. If you can put down 20% or more, you may not need mortgage insurance, which can also reduce your total costs.
Keeping your debt levels low helps too. Lenders will calculate your debt service ratios to make sure you can afford the mortgage along with your other bills. Paying off loans and credit card balances before applying can improve these ratios and help you qualify for better rates.
Risks and Considerations for Variable Rates
While variable rate mortgages can save you money, they also come with risk. The biggest risk is that interest rates could rise, increasing your monthly payments and the total interest you pay over time.
If you have an adjustable rate mortgage where your payments change with the rate, even a small increase can affect your budget. If you have a fixed-payment variable mortgage, rising rates may reduce how much principal you're paying off, which could stretch out your amortization period.
There’s also the possibility of hitting a \"trigger rate.\" This is the point where your payment doesn’t even cover the interest owed, and the lender may require you to increase your payment or make a lump sum contribution.
Another consideration is your personal comfort with uncertainty. If rate changes cause stress or make budgeting hard, you might prefer the security of a fixed rate, even if it costs more upfront.
It’s wise to build a buffer into your finances before choosing a variable rate. Set aside emergency savings and make sure your income can handle higher payments just in case rates rise.
Frequently Asked Questions (FAQs)
Can I switch from variable to fixed during my term?
Yes, many lenders allow you to convert a variable mortgage to a fixed one before your term ends. However, the rate you get may not be as competitive as new fixed rate offers, so compare before deciding.
What happens if interest rates go up?
If you have an adjustable payment mortgage, your payments will increase. If your payments are fixed, you’ll pay more interest and less principal, possibly extending your amortization.
Is a variable rate better for short-term planning?
It can be. If you’re planning to sell or refinance within a few years, a variable mortgage may save you money in the short term.
Are variable rates negotiable?
Yes. Like fixed rates, lenders may be willing to offer better variable rates if you have strong credit and low debt. Use a broker to help negotiate on your behalf.
How often can the rate change?
Rates can change whenever the lender adjusts its prime rate, which usually happens after the Bank of Canada announces a rate change (typically 8 times per year).
Compare Variable Rate Mortgages in Canada with Dollarwise
Variable rate mortgages can be a powerful tool for Canadian homebuyers who are comfortable with a bit of uncertainty. With lower starting rates and the potential for savings over time, they appeal to borrowers who want flexibility and are confident in managing changing payments.
But it’s important to go in with your eyes open. Interest rates can change quickly, and the savings you expect today could turn into higher costs down the road. That’s why it’s so important to understand how variable mortgages work, assess your own risk tolerance, and build some flexibility into your budget.
Use the rate comparison table at the top of this page to explore the best variable rate mortgage rates in Canada today. Then talk to a mortgage broker or advisor who can help you choose the option that fits your needs and financial goals.