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Five-year variable rates give borrowers the chance to pay lower rates in the future if interest rates fall, but if rates rise during the five-year mortgage term, their monthly payments could go up.
Canadian variable mortgage rate update: December 2024
As expected, the Bank of Canada slashed its overnight rate by another 50 basis points on December 11, 2024. Once the cut is absorbed by the nation’s lenders, variable mortgage rates will decrease by 0.5%.
That will bring the lowest advertised variable rates down to around 4.3% at some mortgage brokerages. Variable rates remain closer to 5% at the country’s biggest banks. Another rate cut could be in the cards for January, when the Bank is scheduled to make its next overnight rate announcement.
The Bank’s most recent cut won’t be a game-changer for home buyers or homeowners paying off a variable-rate mortgage. For buyers, it might increase the amount they can borrow by $30,000. For homeowners, it might shave around $100 of their monthly mortgage payments.
What is a 5-year variable mortgage rate?
If your mortgage rate is variable, the interest rate you may rise or fall over the course of your loan term. Compare this to a fixed-rate mortgage, which remains the same throughout the loan, regardless of whether the lender updates the rates it offers new borrowers.
The factors that lead lenders to change their rates usually involve the larger economic context. For example, if the Bank of Canada raises its overnight rate, you can expect your lender to follow suit. If the BoC lowers its rate, your variable rate will likely fall.
This uncertainty creates a risk for borrowers, which is why you’ll typically find variable mortgage rates to be lower than fixed rates. That difference, of course, isn’t guaranteed to last. During times of high inflation, variable rates can surge past fixed rates. A BoC study showed that median payments for borrowers who opened a variable-rate mortgage in February 2022 had risen 70% by November 2023.
What’s the best variable mortgage rate?
Short answer: The “best” variable mortgage rate is the lowest rate you can qualify for on the specific loan product that best fits your finances. The best rate available to one person depends largely on their financial profile, which includes credit score, income and other debts. As a result, there’s no way to determine a “best” or “average” rate that applies to everyone.
Historical variable rate trends
While it’s tempting to compare today’s rates to rates of the past, it’s a fruitless exercise. Just look at the following Statistics Canada data from the past 10 years, which tracks the average variable mortgage rate on insured mortgages in August of each year. The variable mortgage rates available in August 2019 probably seemed really high compared to rates available in the preceding years. But today, those same 2019 rates look pretty sweet. It’s just a matter of perspective.
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Will variable mortgage rates come down in 2025?
The Bank of Canada reduced its overnight rate five times in 2024, capping the year off with two 50-basis point cuts. It might not be quite as aggressive in 2025.
In the first half of 2025, the Bank might feel comfortable shaving another 50 basis point off the overnight rate, which would bring variable mortgage rates down by another 0.5%. Larger cuts might be in play depending on the state of the economy, but the Bank needs time to gauge the impact of its previous actions before uncorking any further supersized cuts.
Predicting variable mortgage rates
Keep an eye on Canada’s inflation rate if you’re trying to anticipate where variable mortgage rates are headed.
If inflation is going up, the Bank of Canada is more likely to raise its overnight rate. When that happens, variable mortgage rates also increase. If inflation is falling, the Bank may lower this rate, which means lower variable rates.
Even professional forecasts are frequently wrong, so never assume you know exactly where rates are heading.
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Pros and cons of variable mortgage rates
Pros:
- Lower rates. This isn’t guaranteed, but variable rates have historically been lower than fixed mortgage rates.
- Lower prepayment penalties. Variable-rate mortgages generally charge lower penalties than fixed-rate mortgages if you prepay too much of your mortgage or break your mortgage contract in some other way.
- Switchability. If you’re afraid rising rates will lead to you being unable to make your payments, you may be able to switch to a fixed rate of interest for the remainder of your mortgage term.
Cons:
- Unpredictability. If variable mortgage rates rise, your mortgage payment could become unaffordable.
- Smaller prepayment penalties still sting. If you break a variable-rate mortgage because of financial difficulties, the penalty could equal three months’ interest.
- No portability. Your lender may bar you from porting a variable-rate mortgage unless you convert it to a fixed-rate mortgage. If you switch, you may not be able to afford your lender’s current mortgage rates.
How to choose between fixed and variable rates
When you compare fixed- and variable-rate offers, don’t stop at comparing what payments would look like today. Work with your lender or use a mortgage calculator to see what the benefit of falling rates would look like — and what it would look like if rising rates were to make your monthly payment go up.
Who variable rates are best for
Choosing a variable-rate mortgage comes with a risk — that your payments will rise. Because variable rates tend to be lower than fixed rates, you’d benefit if rates stay the same or fall during your mortgage term. The more confident you are that this will happen, the more you may consider a variable rate. In addition, a person who chooses a variable rate should be in a financial position to pay a larger amount if rates end up rising. If your initial mortgage payment is already stretching your housing budget, a variable-rate mortgage may be too risky, even if you are confident that rates will fall.
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