Are you considering a 3-year variable rate mortgage in Canada? With numerous options available, it’s essential to understand the ins and outs of this mortgage type before making a decision. This article will provide an overview of 3-year variable mortgage rates in Canada, helping you make an informed choice when financing your home.
What is a 3-year variable rate mortgage?
A 3-year variable mortgage rate is a type of mortgage where the interest rate can change throughout the 3-year term based on market conditions and the lender’s prime rate. The prime rate is the baseline interest rate banks and lenders use to set their variable rates. When the prime rate changes, usually in response to economic factors and the Bank of Canada’s policy decisions, variable rates will follow suit.
Variable rates are typically a discount or premium to the lender’s prime rate. For example, if your variable rate is prime minus 0.5%, your effective rate would be 4.70%, given the current prime rate is 5.20%. If the prime rate changes during your term, your rate will adjust accordingly.
There are two main types of variable-rate mortgages:
- Variable Rate Mortgages (VRM): With a VRM, your payment remains the same even if the prime rate changes. However, the portion of your payment that goes towards interest and principal will change. If rates rise, more of your payment will go towards interest. If rates fall, more will go towards paying down your principal.
- Adjustable Rate Mortgages (ARM): With an ARM, your mortgage payment will change whenever the prime rate changes. If rates go up, your payment will increase. If rates go down, your payment will decrease. This means your payment could change multiple times over your 3-year term.
What Are the Current 3-Year Variable Mortgage Rates in Canada?
As of February 2025, Canada’s best 3-year variable mortgage rates start at around 4.30%. However, rates can vary significantly between lenders. Some of the current posted rates from major lenders include:
| Lender | 3-Year Variable Rate |
|---|---|
| Lowest in Canada | 4.30% |
| Scotiabank | 5.55% |
| CIBC | 4.70% |
| ICICI Bank | 5.25% |
| Laurentian Bank | 5.20% |
| Radius Financial | 4.30% |
Remember that these are just a snapshot of rates and may change frequently based on economic conditions and Bank of Canada policy decisions. It’s always best to check with multiple lenders to find the most current and competitive rates.
What Are the Benefits of a 3-Year Variable Mortgage?
There are several potential advantages to choosing a 3-year variable mortgage:
- Potential Interest Savings: Historically, variable rates have been lower than fixed rates. This means you could pay less interest over your term if rates remain low or decrease.
- Flexibility: 3-year terms are shorter than the popular 5-year terms. This can provide more flexibility if you anticipate a change in your financial situation or want to renegotiate your rate and terms sooner.
- Lower Penalties: If you need to break your mortgage before the end of your term, the penalties for variable-rate mortgages are typically less than those for fixed-rate mortgages. With a variable rate, you’ll usually only pay 3 months’ interest, while fixed-rate penalties can be much higher.
What Are the Risks of a 3-Year Variable Mortgage?
While 3-year variable mortgages have benefits, there are also potential risks to consider:
- Rising Payments: If interest rates rise, your mortgage payments will likely increase. Payment increases can be immediate and potentially significant for those with an adjustable-rate mortgage (ARM). This can strain your budget if rates rise substantially.
- Payment Shock: If rates rise rapidly, ARM borrowers may experience payment shock, where their payments become unaffordable. Even if you have a variable rate mortgage (VRM) with static payments, a significant rate increase could mean that more of your payment is going to interest and less to principal.
- Hitting Trigger Rates: For VRM borrowers, if rates rise to a certain point (called the trigger rate), your payment may no longer cover all the interest. This can lead to your mortgage balance increasing instead of decreasing with each payment, a situation known as negative amortization.
Who Should Consider a 3-Year Variable Mortgage?
A 3-year variable mortgage might be a good fit for you if:
- You’re comfortable with some risk and uncertainty in your mortgage payments.
- You have a stable income and could handle potential payment increases.
- You believe interest rates will likely remain stable or decrease over the next 3 years.
- You value flexibility and want the option to renegotiate or refinance sooner than a 5-year term would allow.
However, a fixed-rate mortgage might be better if you prioritize predictability and stability in your budget. When deciding, assess your unique financial situation, risk tolerance, and goals.
How Do 3-Year Variable Rates Compare to Other Mortgage Terms?
When considering a 3-year variable rate, compare it to other common mortgage terms and types:
- 5-Year Variable Rates: 5-year variable rates offer the same potential benefits and risks as 3-year variable rates but lock you in for a longer term. This can provide more stability but less flexibility.
- 3-Year Fixed Rates: 3-year fixed rates will have a consistent interest rate and payment throughout the term. While they may have a slightly higher initial rate than variable rates, they offer more predictability.
- 5-Year Fixed Rates: 5-year fixed rates are Canada’s most popular mortgage type. They provide long-term stability and predictability, but you may miss out on potential interest savings if variable rates decrease.
How to Qualify for a 3-Year Variable Mortgage in Canada?
To qualify for a 3-year variable rate mortgage, you’ll typically need to meet the following criteria:
- Minimum Down Payment: You’ll need a down payment of at least 5% for homes under $500,000, 10% for the portion of the home price above $500,000, and 20% for homes over $1 million.
- Credit Score: Most lenders require a credit score of at least 600, but a higher score (700+) will give you access to better rates.
- Income and Employment: You must demonstrate stable income and employment to show you can consistently make your mortgage payments.
Before applying for a mortgage, getting pre-approved is a good idea. This involves providing your financial information to a lender who will then estimate how much you could borrow and at what rate. Pre-approval can make the home-buying process smoother and give you a clear budget within which to work.
The Bottom Line
A 3-year variable mortgage rate can be an attractive option for Canadian homebuyers who are comfortable with some risk and value flexibility. Understanding how these rates work, their potential benefits and drawbacks, and how to find the best rates can help you make an informed decision. Before committing to a mortgage, carefully consider your personal circumstances, shop around and consult with financial professionals to find the best deal.
FAQs
Can I convert my 3-year variable mortgage to a fixed rate?
Most lenders allow you to convert your variable rate to a fixed rate at any point during your term without penalty. However, the fixed rate you receive will be based on current market rates, which may be higher than your original variable rate.
What happens after my 3-year term is up?
You'll need to renew your mortgage at the end of your term. You can choose to stay with your current lender or switch to a new one. This is an opportunity to reevaluate your mortgage needs and potentially negotiate a better rate.
How is my mortgage payment calculated with a 3-year variable rate?
Your payment will be based on your current interest rate, mortgage balance, and remaining amortization. With an adjustable rate mortgage (ARM), your payment will change if the prime rate changes. With a variable rate mortgage (VRM), your payment stays the same but the portion going to interest and principal will change.
What is a high-ratio 3-year variable rate mortgage in Canada?
A high-ratio 3-year variable rate mortgage in Canada is a mortgage where the borrower's down payment is less than 20% of the property's purchase price. High-ratio mortgages require mortgage default insurance, which protects the lender in case the borrower defaults on their payments.
How does the stress test affect 3-year variable rate mortgages in Canada?
The mortgage stress test in Canada applies to all mortgages, including 3-year variable rate mortgages. To qualify for a 3-year variable rate mortgage, borrowers must prove they can afford payments based on the greater of their contract rate plus 2% or the Bank of Canada's 5-year benchmark rate.
