A 5-year variable rate mortgage is one of Canada’s most popular mortgage options. With interest rates tied to the lender’s prime rate, these mortgages offer flexibility and the potential for interest savings as rates change. This comprehensive guide examines how 5-year variable rate mortgages work, current rates, pros and cons, comparisons to fixed rates, tips for choosing the best product, and answers to frequently asked questions.
Current 5-Year Variable Rates in Canada
As of January 2025, 5-year variable mortgage rates from major Canadian lenders range from 4.40% to 5.50% for high-ratio mortgages. This is up significantly from the historic lows of 2020-2021 when many variable rates sat below 1%.
Rising inflation has prompted the Bank of Canada to lift prime rates through 2022 and 2024. However, variable rates are expected to fall again if inflation cools down. Current variable rates remain far below the historic highs of the early 1980s.
| Lender | 5-Year Variable Rate |
|---|---|
| TD Bank | 5.19% |
| Scotiabank | 4.75% |
| BMO | 5.86% |
| RBC | 4.65% |
| CIBC | 4.65% |
| National Bank | 5.10% |
| Tangerine | 4.90% |
| Equitable Bank | 4.65% |
| First National | 4.80% |
| MCAP | 5.00% |
*Rates current as of January 5, 2025, for high-ratio mortgages with a 20% down payment or less. Rates are subject to change.
What is a 5-year variable rate mortgage?
A 5-year variable rate mortgage is a home loan with an interest rate that fluctuates based on the prime rate over a 5-year term. With a variable-rate mortgage, the interest rate can go up or down during the mortgage term, which means the borrower’s monthly payments may also increase or decrease.
The prime rate is the benchmark rate at which banks lend to their most credit-worthy customers. As the Bank of Canada raises or lowers interest rates, the prime rate changes as well. Variable-rate mortgages are priced based on the prime rate plus or minus a set percentage or “discount”.
For example, if the prime rate is 5.45%, and you get a 5-year variable rate mortgage at prime – 0.5%, your interest rate would be 4.95%. If the prime rate goes up during your term to 5.5%, your mortgage rate will increase to 5%.
While the interest rate changes, your actual mortgage payment typically stays the same over the 5-year term. However, the amount of your payment going toward interest vs principal will shift as rates change.
Capped variable rate mortgage
A capped variable rate mortgage sets a maximum interest rate that the borrower will pay during the term, even if the prime rate rises above that level. This type of mortgage offers some protection against rate increases but may come with a slightly higher initial rate.
How do changes in the variable rate affect monthly mortgage payments?
With most variable-rate mortgages, the monthly principal and interest payment remains the same when the interest rate changes. However, the breakdown between interest and principal shifts:
When variable rates go down:
- More of the payment is applied to the principal
- The principal is paid off faster
- The full mortgage term may be shortened
When variable rates go up:
- Less of the payment goes toward the principal
- More interest must be paid over the term
- The principal is paid off more slowly
In some rare cases, variable-rate mortgages may have flexible payments that change with rate fluctuations. However, fixed monthly payments are more common.
5-Year Variable Rate vs Fixed Rate Mortgage
| Factor | 5-Year Variable Rate | 5-Year Fixed Rate |
|---|---|---|
| Interest rate | Fixed for the entire 5-year term | Locked in for a full 5 years |
| Monthly payments | Usually fixed | Fixed |
| Flexibility | Can switch lenders, make extra payments | No, the rate is fixed |
| Early termination fee | 3 months interest | IRD penalty based on interest rate differential |
| Potential savings | Yes, if the prime rate decreases | No, the rate is fixed |
| Rate uncertainty | Yes, payments may increase | No, rate and payments are fixed |
Overall, a 5-year variable rate mortgage makes sense if you’re comfortable with some uncertainty and expect interest rates to decrease or remain stable during the 5-year term.
A 5-year fixed-rate mortgage provides stability and may be better suited if rates are forecasted to rise or you want to lock in a low rate. Consult with a mortgage broker to determine what option best fits your financial situation.
Why are 5-year variable rate mortgages popular in Canada?
5-year variable rate mortgages have gained popularity in Canada due to their potential for cost savings when interest rates remain stable or decrease. According to the 2024 CMHC Mortgage Consumer Survey, 23% of Canadian homebuyers opted for a variable-rate mortgage in 2024, demonstrating its prominence in the mortgage market.
The appeal of 5-year variable rate mortgages lies in their ability to offer lower initial interest rates compared to fixed-rate mortgages. When the prime rate remains low, borrowers can benefit from reduced monthly payments and significant savings over the course of their mortgage term. Additionally, variable-rate mortgages often come with more flexible repayment options and lower penalties for breaking the mortgage contract early, making them an attractive choice for homebuyers who value flexibility.
Historical 5-Year Variable Mortgage Rates in Canada
Variable mortgage rates in Canada have steadily declined over the past 40 years, from a peak of 19.81% in 1981 down to around 2% in 2022-2023, before rising again in 2024.
Major historical events that impacted 5-year variable mortgage rates include:
- Oil crises (1970s): Caused high inflation and prime rate hikes up to 21.24%
- 2008 recession: Bank of Canada (BoC) cuts prime rate to stimulate economy
- COVID-19 (2020): BoC slashes rates to 0.25% to support recovery
Factors That Affect Your 5-Year Variable Mortgage Rate
The Bank of Canada (BoC) directly influences variable mortgage rates by setting the prime rate, which variable rates are based on. The BoC adjusts prime rates based on economic factors like:
- Inflation: Raising rates helps cool inflation. Lowering rates stimulates growth.
- Employment rates: Low rates support job creation. High rates prevent overheating.
- GDP growth: Low rates encourage spending and growth. High rates prevent uncontrolled expansion.
The Bank of Canada manages economic goals like controlled inflation and sustainable GDP growth by adjusting interest rates.
What are the Cons of 5-year variable rate mortgages?
There are 3 potential risks of 5-year variable rate mortgages to consider
- Risk of rising interest rates and higher monthly payments: If prime rates increase, variable-rate mortgages are impacted immediately. This could mean unaffordable payments. Fixed rates offer stability and predictability instead.
- Uncertainty and difficulty in budgeting: Due to fluctuating payments and interest costs, variable-rate mortgages make it harder to predict budgets over a 5-year term compared to fixed rates.
- Potential to hit the trigger rate and face negative amortization: The mortgage balance can increase if rates rise enough that mortgage payments no longer cover accrued interest charges. This triggers a requirement to raise payments immediately.
In addition to the interest rate, borrowers should consider the following factors when comparing variable mortgage products:
- Prepayment Privileges: Look for a mortgage that allows you to make additional payments or increase your regular payment amount without penalty, as this can help you pay off your mortgage faster and save on interest costs.
- Mortgage Portability: If you plan to move during your mortgage term, choose a product that allows you to port your mortgage to a new property without penalty.
- Conversion Options: Some lenders can convert a variable-rate mortgage to a fixed rate during the term. This feature can provide peace of mind if you anticipate interest rates will rise significantly.
How to Get the Best 5-Year Variable Mortgage Rate?
To secure the best 5-year variable mortgage rate, borrowers should:
- Maintain a Good Credit Score: A higher credit score demonstrates financial responsibility and can help you qualify for lower interest rates.
- Shop Around and Compare Rates from Multiple Lenders: Don’t settle for the first offer you receive. Compare rates and terms from various banks, credit unions, and mortgage brokers to find the best deal.
- Consider Using a Mortgage Broker: Mortgage brokers have access to a wide range of lenders and can help you find the most competitive rates and terms based on your specific financial situation and needs.
Is a 5-Year Variable Rate Mortgage Right for You?
Determining whether a 5-year fixed mortgage is the right choice depends on your risk tolerance, financial goals, and economic factors.
Assessing your risk tolerance
Consider your comfort level with interest rate fluctuations and budget uncertainty over 5 years. Are you willing to weather potential rate hikes in exchange for initial savings? Or does the stability of a fixed rate appeal more to your risk preferences? Be honest about your ability to adapt to rising variable mortgage costs.
Evaluating your financial situation and goals
Factor in your income stability, job security, other debts, and savings. Ensure you have financial wiggle room in case rates increase. Are you hoping to pay off your mortgage aggressively? Variable rates allow bigger principal payments when rates fall. Or do you need to set housing costs each month?
Considering the current economic climate and interest rate predictions
Economists expect further rate hikes in 2023-2024 to curb inflation, meaning variable rates likely will rise. But fixed rates are also increasing. Monitor Bank of Canada announcements and inflation reports to make the best decision for today’s environment.
When to consider switching from a variable rate to a fixed-rate mortgage
Explore today’s fixed rates if your variable rate mortgage is becoming unaffordable due to rising rates. Calculate whether the interest rate differential justifies paying penalty fees to break your variable mortgage. Get advice from a mortgage broker about your options.
Key takeaways
Recap of the key points about 5-year variable rate mortgages in Canada:
- Variable rate mortgages fluctuate based on the prime rate set by the Bank of Canada
- Monthly payments are typically fixed, but the interest/principal split changes
- Variable rates carry risks of increases but offer savings potential when rates fall
- Consider your budget, risk tolerance and economic conditions before choosing
- Shop around for the best variable rate and get advice from a broker
There are many factors to consider when choosing between fixed and variable-rate mortgages in Canada. Speaking with an independent mortgage broker at Best Mortgage Online can help you evaluate the options based on your unique financial situation and risk tolerance. Understand the key features available so you can find the most flexible and cost-effective product.
FAQs
Can I switch from a 5-year variable to a 5-year fixed mortgage?
Yes, most lenders allow you to switch from a variable to a fixed-rate mortgage within a term without penalty. Some conditions may apply.
What happens if variable mortgage rates increase significantly?
If rates rise substantially, more of your payment goes toward interest costs rather than your principal. This can slow down how quickly your mortgage is paid off. In worst cases, you may reach a trigger rate where payments must be increased.
How often do 5-year variable mortgage rates change?
Variable rates can change any time the lender's prime rate changes. Prime rate adjustments happen fairly infrequently, a few times per year up to once per month, depending on economic conditions.
Should I get a capped variable rate mortgage?
Capped rates protect against rising variable rates while still offering savings when rates decrease. Shop around for the best capped rates, or speak with a broker about your options.
Does the Bank of Canada control variable mortgage rates?
Indirectly, the Bank of Canada's overnight rate influences the prime rates at commercial banks. As prime fluctuates, variable mortgage rates move up or down accordingly.
