Compare the Best Variable Mortgage Rates in Canada

Step-by-Step Guide

Most mortgage holders in Canada opt for a fixed mortgage rate instead of a variable or variable mortgage rate. However, this is mainly due to the perception that a fixed mortgage is the best option as it offers stability and predictability of payments. Instead, compared to Canada’s variable mortgage rates, it is considered the safer option. 

A longer-term mortgage strategy suggests that borrowers would save more if they opt for variable-rate mortgages. This makes variable-rate mortgages in Canada an option worth exploring. 

Variable interest rates can adjust throughout the mortgage term to realize incremental interest savings with each rate reduction. Opting for a variable interest rate can result in lower rates and more overall savings than a fixed rate. 

Variable mortgages come in two forms:

1. Variable rates with adjustable payments
2. Variable rates with fixed payments

What is a Variable Rate Mortgage?

A variable-rate mortgage is a loan where the interest rate fluctuates over time. The borrower pays a fixed amount that adjusts with changes in the lender’s prime rate. Variable rates are typically lower than fixed-rate mortgages, but there is an increased risk that payments may become unaffordable as interest rates rise.

Research suggests that borrowers may pay less interest over the mortgage life with variable-rate loans than with fixed-rate loans. Nevertheless, historical trends are not a reliable predictor of the future. It is important to remember that the loan’s amortization period will consist of many term lengths, each with its mortgage rate. Each rate will be based on the market conditions and your mortgage needs.  Each new rate will affect how much your payments change. With more extended loan periods, any rate shift can have a sizable outcome on your premiums.

There are two types of variable-rate mortgages:

Variable rates with adjustable payments are known as adjustable-rate mortgages (ARM).

Variable rates with fixed payments are known as variable-rate mortgages (VRM).

Adjustable-Rate Mortgages

Fluctuations in interest rates affect the amount you pay on your monthly mortgage if you opt for adjustable payments. In comparison, the principal portion of your mortgage payment that pays down your mortgage balance remains the same. As rates change, the portion that goes to interest payment changes. These changes in interest payments increase your monthly payment but do not affect your amortization.  Note that lenders and brokers use variable mortgages to refer to adjustable and fixed payments on a fluctuating interest rate; therefore, if you’re looking for a specific type of variable-rate mortgage, then ask them directly to understand that it’s the right one for you.

Variable-Rate Mortgages

Under this option, regardless of fluctuations in interest rate, your payment remains constant over your mortgage term. If you opt for one of the best variable mortgage rates in Canada, with a fixed payment, this rate and payment will last through the end of the term.

If there is an increase in your lender’s prime rate, then a more significant portion of your mortgage payment will go toward the interest component of your variable-rate mortgage. Therefore as rates increase, a fixed payment variable rate could mean less being paid down on the principal balance of your mortgage. If this continues for some time, then you could run the risk of reaching your trigger rate. The trigger rate is specific to each mortgage contract – it is the point at which no principal is being paid down – your payment is fully servicing the interest component of your mortgage payment.

The mortgage repayment schedule, also known as the amortization schedule, is based on the premise that timely scheduled payments will mean your mortgage is fully paid off in its amortization.  However, as time lapses and no principal repayments are made, the amortization on the variable-rate mortgage can increase over time.  Your lender may increase your payments on your variable-rate mortgage if the payment no longer covers any repayment of your principal balance.  However, the lender may also wait til you reach your trigger point. The trigger point is reached when the mortgage balance amount is more than the original mortgage you received at the start of your contract. 

Check out your variable-rate mortgage contract to understand your trigger rate. Your trigger point will depend on many factors –  including your original mortgage amount and how quickly the prime rate increase in Canada. You can circumvent reaching your trigger rate or trigger point by proactively increasing your regular mortgage payments or making additional lump sum payments to your mortgage principal.

Conversely, if rates should reduce, you’ll pay off your mortgage quicker with this scenario.  More of your mortgage payment will go towards mortgage principal repayments – hence reducing your remaining amortization at the end of your term more than just by the amount of time elapsed.  This is typical of observations on how variable-rate mortgages in Canada have behaved over the last 40 years.

Popular Variable-Mortgage Terms

Similar to the 5-year fixed rate, the 5-year variable rate is another popular option. The 3-year and 5-year mortgage terms are the most popular variable rate options. For people who are not confident that they would remain in the same home for 5 years, a 3-year term on a variable-rate mortgage in Canada may be a better option.  

Homebuyers looking to save on their mortgage over the long term and willing to take on some additional risks should opt for a variable-rate mortgage.

In this circumstance, the variable rate mortgage is perfect for fiscally conservative borrowers looking to renew their mortgage or buy a home in a falling-rate environment. This is an excellent opportunity to explore the variable-rate terms and enjoy the most savings with the best variable mortgage rate. To determine which mortgage solution is most suitable, contact one of our experts today to help you find the lowest variable mortgage rates.

Open vs Closed Mortgages.

An open mortgage will allow you to prepay or pay off your mortgage anytime during your term without a prepayment penalty. The compromise for this flexibility is a higher interest rate, as you’re at more risk to the lender of paying off your mortgage at any time.

A closed mortgage offers much lower rates than an open mortgage as you’re limited with the prepayments you can make annually. The prepayment options and annual limit allow the lender to continue charging you interest-carrying costs on the unpaid portion each year. The annual principal prepayment limit, the number of options and the times you can exercise your prepayment privileges annually varies between lenders and mortgage solutions. More generous prepayment privileges will come with higher interest rates.

What Drives Changes in Variable Mortgage Rates?

A variable-rate mortgage fluctuates with your lender’s prime rate – which mirrors the movement in the Bank of Canada’s Policy Rate – throughout your mortgage term. The Bank of Canada sets a baseline interest rate twice every quarter. This baseline rate is known as the Key Overnight Target Rate or the Key Policy Rate, used to lend money to banks.  Banks will add a spread to this baseline and call it their prime rate. Generally, all lenders will follow suit to keep their prime rates in line with the country’s Big Six chartered banks. 

Banks make greater profits while taking on fewer risks when they sell fixed-rate mortgages over variable-rate mortgages. The increased profits make it worthwhile for the banks to promote it more and drive their clients to select fixed over variable rates. This is the primary driver and reason for Canada’s overall popularity of the 5-year fixed rate.

Frequently Asked Questions