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Understanding Variable Rate Mortgages In Canada

Compare variable mortgage rates in Canada

Romana King
Author: Justin da Rosa

By Romana King & Justin da Rosa

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Updated: September 13, 2024

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Amortization periods, mortgage terms, fixed vs. variable rates. There are so many factors to consider when choosing a mortgage that, quite often, choosing the best mortgage becomes a stressful, daunting task. To reduce the anxiety and help you find the best rate and terms, it pays to learn a bit about the advantages of variable-rate mortgages—home loans that, historically, offer some of the most competitive rates in the market. 

Today’s current variable mortgage rates in Canada

What is a variable rate mortgage?

A variable-rate mortgage is a home loan where the interest charged on the loan can rise or fall, based on market conditions. For instance, if your mortgage amount is $400,000 with a variable interest rate of 3.50% over a 25-year amortization period, your monthly mortgage payment will initially be $1,997. However, if the Bank of Canada increases interest rates and your lender adjusts it to 4%, your monthly mortgage payment will rise to $2,113.

While homeowners who opt for variable-rate mortgages tend to take on more risk, due to these fluctuations, historically, they’ve been rewarded with lower, average interest rates when compared to fixed mortgage rates. But to get the best deal on your mortgage, it helps to learn a bit more about variable rates, including the different options available in the marketplace, as well as get tips on how to choose the best mortgage for your needs.

Types of variable rate mortgages in Canada

There are a variety of variable-rate mortgage loans available to Canadian property owners. In general, though, there are two main types of variable-rate mortgages, along with two variations.  

Open variable rate mortgage

An open variable rate mortgage allows the borrower to make extra payments whenever they like, without incurring a penalty or fee. These extra payments — referred to as prepayments — can be advantageous, as they help to reduce the overall debt and this helps reduce the interest charged on the mortgage loan.

Open variable rate mortgages are a good option for people who want to pay off their mortgage quicker and lower the amount of interest they pay over the life of the mortgage. Ideally, they suit homeowners who anticipate a cash windfall that would allow them to make a sizable prepayment (and don’t want to be penalized for the freedom to pay down the debt).

Closed variable rate mortgages

Closed variable rate mortgages may limit, or not allow extra payments during the mortgage term. With closed mortgages, it’s important to look at your contract to see what the lender’s policy is for prepayments before making an extra payment. 

Open vs closed rate mortgages

While an open variable rate mortgage sounds ideal — since it allows you to use extra money to repay the principal debt faster — the drawback is that an open variable rate mortgage typically comes with a higher interest rate. Lenders charge more because of the flexibility offered by an open mortgage. On the flip side, a closed mortgage may restrict how much (if any) prepayments you can make to reduce your overall debt, but the lower interest rate makes payments more manageable.

Adjustable rate mortgages

Adjustable rate mortgages are similar to variable rate mortgages – in fact, they’re often confused with one another. While an adjustable-rate mortgage and a variable-rate mortgage both have mortgage rates that  fluctuate based on different economic factors, how these fluctuations are implemented by the lender, and the impact on the borrower, can be quite different. 

With a variable-rate mortgage, the mortgage rate may change over time but the regular payments will remain the same. The impact of the fluctuating rates is not on how much the borrower pays, but on how much of each payment goes towards repaying the mortgage loan debt. For example: If rates go up, your payment  remains the same but more of the regular payment is used to pay off the accumulated interest.

The mortgage rate on an adjustable-rate mortgage will also fluctuate; however, when rates rise or fall, so will the regular payment sum. In a falling rate environment, this means a borrower could end up paying less each month to pay off their mortgage, while a rising rate environment can prompt an increase in how much a borrower must pay to repay the mortgage loan and interest payments.

Hybrid mortgages

The last type of mortgage that uses a variable-rate is a hybrid mortgage. Also known as a combination mortgage, hybrid mortgages are a mix of fixed and variable rates — with a portion of the mortgage payment allocated to a fixed rate and the remaining portion allocated to a variable rate. The most common split is 50/50, with half the mortgage under a fixed-rate and the remaining half under a variable rate. While hybrid mortgages can help homeowners unsure about whether or not to lock-in rate, there can be some serious drawbacks. For instance, if rates rise relatively quickly, a portion of your mortgage may need to be recalculated, prompting an increase in your regular payment as well as a lengthening of your amortization (the length of time until you are mortgage-free).

To choose the best variable rate mortgage you need to first consider if you can withstand the risk of fluctuating rates, before selecting a variable rate that meets your current budget constraints and your future economic goals.

Factors that affect variable mortgage rates in Canada

What determines the up and down movement of interest rates (and variable rate mortgages) can be  a complicated game of economic chess, but by far the biggest factor is the decisions made by the Bank of Canada (BoC). Eight times a year, the BoC will announce monetary policy — economic decisions that impact the cost of borrowing. These economic decisions influence how much your lender will charge you when you borrow to buy property. 

But BoC decisions are not the only factors that impact the variable rate you are offered by your lender. 

Other factors include: Your credit score, credit history, the income you earn and how much debt you carry. 

What that means is that the posted variable rate offered by a bank or lender is a starting place — with borrowers able to negotiate lower or higher rates, depending on current economic decisions and personal financial factors. 

Negotiate the best rate with Homewise

Key differences between variable rate and fixed rate mortgages

Fixed interest rates

  • Consistency: The interest rate remains the same throughout the loan term
  • Predictability: Monthly payments are consistent and predictable
  • Budgeting: Easier to plan and budget for current and future expenses
  • Security: Provides financial security against rising interest rates
  • Typically higher than variable rates: Historically, fixed-rate mortgages charge higher rates than variable-rate mortgages

Variable interest rates

  • Fluctuations: The interest rate will change based on the Bank of Canada’s monetary policy
  • Tied to economic factors: Market conditions, such as inflation and GDP growth will impact prime rate, which impacts variable rates
  • Savings opportunity advantage: Historically, variable rates are lower than fixed rates, giving borrowers an advantage to either get into their first property or strategically use lower rates and prepayments to pay down their mortgage debt
  • Risk: Borrowers assume the risk of potential rate increases, which can lead to higher payments or more of their regular payment going toward interest not loan repayment
  • Potential savings: Can result in lower overall costs if interest rates decline or remain stable

Popular variable rate mortgages in Canada

Historically, the most popular mortgage term is five years, meaning most homeowners opt for a five-year variable-rate mortgage or a five-year fixed-rate mortgage. This is because lenders want some security of having a customer on the books, repaying a loan and the interest accrued, and are willing to offer a competitive rate to get your longer-term commitment.

However, to get the best, current variable-rate, be sure to shop around. There have been times when three-year or even four-year variable rates offered the best rates to borrowers. Be sure to spend some time comparison shopping. A good option is to talk to an independent mortgage broker — a specialist who works with dozens of lenders to match clients with the right products.

Another good reason for choosing a variable rate mortgage is when you believe interest rates are going to fall. Selecting a variable rate mortgage allows you the flexibility to opt for current rates, with the option to lock in to a fixed rate mortgage contract, which may or may not incur a penalty - and lock in when rates drop. For more, read the Money guide on when to switch mortgages.

Get the best mortgage rate

Pros and cons of getting a variable rate mortgage in Canada

Here are the major pros and cons of variable mortgage rates.

Pros

Pros

  • Often more affordable than fixed rates

  • Opportunity to save money if rates fall

  • Opportunity to save on interest if prepayments are used to help reduce overall debt sooner

Cons

Cons

  • Inconsistent rate throughout your mortgage term

  • Not as good for budgeting

  • Spend more money if rates rise

How do I know if a variable rate mortgage is right for me?

To determine if a variable rate mortgage is right for you, answer these four questions: 

1. Do you believe rates will fall in the near future?

If yes, then a variable rate may be better as it allows you to take advantage of falling rates (and you can pay more of your mortgage loan and less interest).

2. Are you comfortable with interest rate uncertainty?

If yes, then a variable rate mortgage is right for you. It allows you to take advantage of lower rates (historically, variable rates are usually lower than fixed rates).

3. Do you plan to move, but are still uncertain?

If yes, then a variable-rate mortgage may be best. If there is a penalty to break a variable-rate mortgage, it is typically much lower than breaking a fixed-rate mortgage. As such, anyone uncertain about their future living arrangements should consider a variable-rate mortgage.

4. Do you have a plan to aggressively (or systematically) pay down your mortgage?

If you plan to make use of prepayment privileges, then a variable rate mortgage can be ideal. By taking a cheaper rate, but increasing the amount you repay you can shave years off your amortization and tens of thousands off of the interest you pay.

To determine what’s best, consider using a mortgage calculator to play around with different interest rate options and prepayment plans. 

Remember to consider your short-term and long-term goals, as well as how long you plan to stay in your current home, before selecting a mortgage term and rate. 

Tips on securing the lowest variable mortgage rate

Some things you can do to get the best variable mortgage rate:

  1. 1.

    Shop around and compare rates: Broaden your search beyond your current bank to find competitive offers. Compare different rates and terms.

  2. 2.

    Increase your credit score: Ensure consistent, punctual settlement of credit card bills to bolster your creditworthiness.

  3. 3.

    Strengthen your credit history: Cultivate a varied credit portfolio and maintain accounts in good standing over time to build a robust credit history.

  4. 4.

    Avoid unnecessary credit inquiries: Refrain from applying for new credit, such as credit cards or car loans, prior to seeking a mortgage, to keep from allowing a hard credit check which would reduce your credit score.

  5. 5.

    Reduce debt burden to improve debt-to-income ratio: Prioritize paying down debts to effectively lower your debt-to-income ratio.

  6. 6.

    Increase your income stability: Seek to increase stability in your income streams to demonstrate financial reliability to lenders.

  7. 7.

    Increase initial down payment to minimize CMHC insurance costs: Boost your down payment to qualify for reduced CMHC insurance premiums and save on overall mortgage expenses.

Variable rate mortgages in Canada FAQs

  • Can I lock in a variable mortgage rate?

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    When you lock in a variable rate mortgage, you are effectively switching from a variable rate mortgage to a fixed rate mortgage. Switching is another term for breaking a mortgage contract, so be sure to find out what penalties or fees are required before making this move.

  • Can I remortgage a variable mortgage?

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    Yes. You can remortgage a variable mortgage, however, be aware that all lenders involved will need to authorize this process. Typically, a remortgage is when a homeowner gets one mortgage that is then used to pay off another mortgage. In Canada, this process is similar to a refinance or renegotiating a mortgage (where you break one mortgage contract in order to lock in a better mortgage loan). In most cases your lender will charge you penalties and fees so be sure to s. talk to your lender to find out your options.

  • How can I switch my variable rate mortgage to fixed?

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    You can switch from a variable rate to a fixed rate mortgage at any time; however, keep in mind that switching a mortgage requires you to break your current mortgage contract and this will prompt your lender to charge you fees. .

  • Will variable rates go down in Canada?

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    Variable rate mortgages are based on the current bank prime rate, which is tied directly to the Bank of Canada target rate. It is predicted that the Bank of Canada will continue to lower rates in 2024 — meaning variable mortgage rates should also go down — but there is no guarantee.

Romana King Senior Editor, Money.ca

Romana King is the Senior Editor at Money.ca. She writes for various publications, and her book -- House Poor No More: 9 Steps That Grow the Value of Your Home and Net Worth -- continues to be an Amazon bestseller. Since its publication in November 2021, this book has won five awards, including the New York CPA Society's Excellence in Financial Journalism (EFJ) Book Award in 2022.

Justin da Rosa Freelance Writer

Justin is a writer and editor who has been covering personal finance for over 10 years. He's written for companies such as KOHO, Ratehub, BMO, Zoocasa, and Questrade, among others. Justin also created a course in Content Creation, which he taught at York University for four years. When not writing, Justin can be found at a live concert, on the golf course, riding a motorcycle, or sailing.

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