Variable Mortgage Rates

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Fixed vs. Variable Mortgages

Fixed-rate mortgages have an interest rate that does not change for the length of your mortgage term. Having your mortgage rate set ahead of time allows for you to not have to worry about mortgage rates until your mortgage is up for renewal again. However, fixed rates are usually higher than variable rates.

If you’re comfortable with uncertainty in future mortgage rates, a variable rate mortgage can save you money if interest rates stay the same or fall in the future. You can still save money with a variable rate mortgage if interest rates rise slightly in the future.

For example, you might be offered a fixed-rate mortgage at 3% or a variable-rate mortgage at 2%. If your variable-rate stays at 2% and then increases to 3% in three years and 4% in four years, you may still be saving money with a variable rate. You would have two years where you would be benefiting from a rate that is 1% lower than the fixed-rate offered. This extra interest savings may offset the one year where your variable rate is 1% higher than the fixed rate.

Another key benefit of variable rate mortgages is their lower mortgage penalties. With a variable rate, mortgage prepayment penalties will generally only be three months' of interest. For fixed mortgages, the penalties can be significantly higher using an interest rate differential.

Variable Rate Mortgage Strategy

You can reduce the risk of a variable rate mortgage and possibly pay off your mortgage faster by treating your mortgage like a fixed rate mortgage. You can use the interest savings from a lower variable rate to make mortgage prepayments, or you can save them to use in the event that variable rates increase. This helps protect you from increases in variable rates by storing up savings from the beginning of your term.

For example, let's look at a $500,000 mortgage with a 25-year amortization and monthly mortgage payments. You're looking to get a mortgage for a 5-year term.

You decide to get a 5-year variable rate mortgage with a rate of 1.50%. This means that your monthly payments will be $2,000. The current best fixed mortgage rate is 2.50%. If you had gotten a fixed rate mortgage instead, your monthly payments would have been $2,240.

With a variable mortgage rate, your monthly payments are currently $240 lower every month. You can use this for mortgage prepayments, which can be used to increase your monthly payments to $2,240, so that you'll be paying off your mortgage faster and sooner. You can also use the savings for other uses, such as to pay high-interest debt.

Hybrid Mortgages

For homeowners that can’t decide between a fixed rate or a variable rate, a hybrid mortgage allows you to have both. A hybrid mortgage, also known as a combination mortgage, combines a fixed rate portion with a variable rate portion to make up your mortgage.

The portions don't necessarily need to be 50% fixed and 50% variable either. Some hybrid mortgage lenders, such as Desjardins, allow you to have several portions with different terms, mortgage rate types, amortization, and payment frequency. For example, you can choose to have 30% of your mortgage being a variable rate with a 5-year term, and 70% of your mortgage having a fixed rate with a 3-year term.

Frequently Asked Questions about Variable Rate Mortgages

Capped Variable Rates

A capped variable rate is a maximum limit that your variable mortgage rate can go to during your term. This limit protects you from significant interest rate increases, but your base variable rate may be higher to account for this feature.

You might want to benefit from any decrease in interest rates, but you want to limit how high your mortgage interest rate can go. For example, a mortgage lender might offer a variable rate of 2.00%. For a variable rate mortgage with a capped rate, the mortgage rate might be slightly higher, such as at 2.50%. Some lenders might have a capped rate that can already be extremely high, such as 7%. Should variable mortgage rates rise to 10%, your variable mortgage rate will be capped at 7%.

Variable Mortgage with Fixed Mortgage Payments

Most banks offer variable mortgage payments that are fixed, even if your variable rate changes. For homeowners that want certainty in their monthly mortgage payments, a fixed variable mortgage payment means that their day-to-day budget won’t be impacted if interest rates rise. Instead, a larger portion of your regular mortgage payment will shift from paying down your principal to covering your interest cost.

If variable rates decrease, you'll be paying more towards your principal, which means that you are paying off your mortgage faster. If variable rates increase, you’ll be paying your mortgage slower, which will cause your mortgage amortization to temporarily be longer. For CMHC-insured mortgages with a maximum allowed amortization of 25 years, your variable rate mortgage still needs to be within this limit. If you have just recently signed a variable mortgage, and your mortgage amortization temporarily becomes longer than 25 years due to a rise in variable rates, then you will need to be put back on track. Once your mortgage term is over and you renew your mortgage, you will need to make larger mortgage payments to pay off your mortgage on schedule.

While fixed mortgage payments offer certainty for your budgeting, it’s still not guaranteed that they will remain fixed. Your regular mortgage payments still need to be enough to cover your mortgage interest. If variable rates rise significantly, and your mortgage payment doesn't cover your mortgage interest, then your fixed mortgage payment will need to be increased.

To see how this works, let's consider a $2,000 monthly mortgage payment that has $1,000 going towards your mortgage principal and $1,000 will go towards interest. Suppose variable mortgage rates rise significantly to the point where $2,000 will go towards interest. That leaves $0 for your principal payment, if your monthly mortgage payment stays the same at $2,000. If variable rates rise any further, in this case a rise that pushes your monthly interest over $2,000, then your monthly mortgage payment will also increase.

Once your variable term is over, you will need to accelerate your amortization by increasing the size of your mortgage payments for your subsequent mortgage term to make up for the principal that you did not repay as scheduled.

Variable Mortgage with Variable Mortgage Payments

Having a variable mortgage payment with your variable rate mortgage means that your payments will fluctuate along with your mortgage rate. In Canada, this is also known as an adjustable rate mortgage (ARM).

Since adjustable rate mortgages have a mortgage payment that changes with your variable rate, your mortgage’s amortization won’t change even if your rate changes. This allows for your mortgage to be paid off on-time. However, changing mortgage payment requirements can make it difficult to budget for, as rapidly rising variable rates may cause your mortgage payments to increase significantly.

Scotiabank is one of the few major banks in Canada that offer variable mortgages with fluctuating mortgage payments. With Scotiabank, the Scotia Flex Value mortgage has a mortgage payment that changes every time your mortgage rate changes. If you don't want a changing mortgage payment, then the Scotia Ultimate Variable Rate mortgage allows you to have a fixed mortgage payment. Scotiabank only offers fixed mortgage payments for variable mortgages with a 3-year term. Scotiabank’s 5-year variable mortgage has a variable mortgage payment.

Adjustable-rate mortgages are more common at B-lenders and smaller mortgage lenders. Some lenders, such as CMLS, allow you to convert your adjustable-rate mortgage to a fixed-rate mortgage.

Canadian mortgage lenders that offer variable-rate or adjustable-rate mortgages with variable payments include:

Is getting a variable rate mortgage a good idea?

Historically, borrowers with variable mortgages have saved money compared to borrowers with fixed mortgages. If you’re willing to put up with a little more uncertainty and to take on more risk, then a variable mortgage gives you the possibility of saving money. For borrowers not willing to take the gamble of getting a variable rate, then a fixed rate allows borrowers to pay a slight premium for peace of mind, knowing that their mortgage rate can’t increase in the meantime. Depending on your variable mortgage, interest rate changes can have a significant impact on your finances if your payment fluctuates with your rate, or no immediate impact at all on your budget if it is fixed.

How much lower are variable rates?

Comparing the best 5-year variable mortgage rate with the best 5-year fixed mortgage rate shows that the best variable rate is 0.40% lower than the best fixed rate as of July 2021. For Canada’s major banks, their variable rates can be around 0.90% lower than their fixed rates.

With mortgage rates already so low, an even lower variable rate can be a huge discount to your mortgage payments. As of July 2021, HSBC's best 5-year fixed rate for an insured high-ratio mortgage was 2.24%, while HSBC's best 5-year variable rate was 1.34%. This makes the difference 0.90%, but in terms of interest savings, the difference between a mortgage rate of 2.24% and 1.34% is 67%. In this case, choosing a variable mortgage rate with HSBC over a fixed rate can reduce your mortgage interest by 67%.

Not all lenders offer lower variable rates when compared to their fixed rates. National Bank's 5-year variable rate of 2.45% as of July 2021 is higher than their 5-year fixed rate of 2.44%.

How much can I save with a variable mortgage rate?

A quick calculation shows how much interest you can save over a 5-year term with a 25-year amortization. Using a mortgage payment calculator for a $500,000 mortgage, a fixed mortgage rate of 2.24% will mean that you’ll pay $51,490 interest over 5 years. With a variable mortgage rate of 1.34%, you'll only pay $30,578 interest, for a savings of over 67%.

Of course, this assumes that the variable mortgage rate will stay the same over the 5-year term. If rates increase, your savings will be reduced. If rates fall, your savings will be increased.

What is the difference between open-variable mortgages and closed-variable mortgages?

The difference between open and closed mortgages is based on the amount of mortgage prepayments allowed. A closed variable mortgage limits the amount of prepayments that you can make before you incur prepayment penalties. If you have extra cash saved up and you would like to use it to make extra mortgage payments, your lender will have a set limit that you can pay before they charge penalties. Most major banks only allow you to make a prepayment of up to 10% or 15% of your original principal amount. If you break your closed variable-rate mortgage, prepayment penalties of three-months of interest will be charged.

Variable-open mortgages have no prepayment limits. You can even pay off your mortgage entirely without any prepayment penalties.

If you know that you want to make large principal payments or would like to refinance in the near future, an open variable mortgage would allow you to do so. However, since open mortgages are more flexible, open mortgages usually have a higher interest rate compared to closed mortgages.

Are prime rates different between RBC, TD, Scotiabank, BMO, and CIBC?

Canada's major banks all usually have the same prime rate, which will be based on the Bank of Canada's policy interest rate. As of July 2021, the Prime Rate at Canada’s major banks was 2.45%. This rate is used to price variable mortgage rates at these banks. The only exception is TD, which has a different prime rate for their mortgages. The TD Mortgage Prime Rate is 2.60%, compared to the TD Prime Rate of 2.45%.

The major banks follow each other closely when changing their prime rates. For example, the Bank of Canada made an interest rate announcement on July 12, 2017 at 10:00 am EST, saying that they are increasing the policy interest rate by 0.25%. RBC led the other banks by announcing that RBC's Prime Rate will increase by 0.25% at 12:30 pm EST, while TD, Scotiabank, CIBC, and BMO announced their prime rate increases over the next two and a half hours after RBC’s announcement. When the Bank of Canada increased interest rates on January 17, 2018, RBC was also the first bank to increase their prime lending rate.

Will prime rates always follow Bank of Canada policy rate changes?

Prime rates will always follow the direction of policy rate changes made by the Bank of Canada, but the size of prime rate changes might not be the same. For example, between July 2015 and October 2018, the Bank of Canada overnight rate increased by 1.25%. The Prime Rate of Canada's major banks also increased by 1.25%, resulting in rising variable rates.

There were moments when the major banks didn’t pass along all of the Bank of Canada’s changes. In 2015, the Bank of Canada cut interest rates by 0.50%. In return, the major banks only cut Prime Rates by 0.30%. This means that variable-rate borrowers weren’t able to receive the full decrease that the Bank of Canada made. Between September 2008 and January 2009, the Bank of Canada's overnight rate decreased 2%, but prime rates only decreased 1.75%. The Bank of Canada doesn’t directly set prime rates, and so while the major banks can be quick to raise prime rates, they can be slow to decrease prime rates.

Why are variable rates now lower than fixed rates?

Economists at Canada’s major banks are predicting that interest rates and mortgage rates will rise over the next few years. In spite of the general expectation that rates will rise in the future, why are variable rates still lower than fixed rates?

One reason might be due to future expectations of where interest rates will go. Lenders think that there will be rate hikes by the Bank of Canada in the future, and so they will price variable rates low today in hopes of increasing them later. By driving borrowers towards low variable rates, lenders will be able to gain from rising variable rates, instead of having borrowers choose a fixed rate.

The opposite could also be seen in recent years. In early 2019, as Canada's economy slowed, there was a possibility of the Bank of Canada decreasing interest rates. This led to a reversal of the variable rate's usual discount to fixed rates. According to the CMHC, from March 2019 to February 2020, variable rates were priced at a premium to fixed rates. If interest rates were expected to fall, then lenders would want more borrowers with fixed rates while rates are still high, compared to a variable rate that would allow borrowers to enjoy lower rates.

5-year variable rates remained higher than 5-year fixed rates until February 2020. Since then, variable rates have been lower than fixed rates.

Are variable mortgage rates lower for high-ratio mortgages?

High-ratio mortgages almost always have a lower mortgage rate than conventional mortgages, or they would at least have the same mortgage rate. It’s unlikely to find a high-ratio mortgage having a higher rate than a conventional mortgage. By making a down payment less than 20%, you’re required to have mortgage default insurance. This makes the mortgage risk-free for the lender, making them able to offer a lower mortgage rate.

For example, a variable high-ratio mortgage with CIBC might have a mortgage rate of 1.54%, while a conventional variable rate mortgage with CIBC might have a rate of 1.60%. While high-ratio mortgages might have a slightly lower variable mortgage rate, the interest savings can sometimes be negated through CMHC insurance premiums that the borrower has to pay.

How many times will variable mortgage rates change in 5 years?

Variable mortgage rates can change when your lender’s prime rate changes, which can be changed at any time by your lender. The most significant changes will be based on the Bank of Canada’s interest rate decisions. From 2010 to 2020, Canada prime rates changed 13 times in these ten years. Eight of these were rate increases, while five were rate decreases. Most of the rate changes were 0.25%, but they can be as small as 0.15% as seen in 2015, or as large as 0.50% each as seen in 2020.

This would average out to about 6 rate changes in a 5-year mortgage term, however, rate changes aren't spread out evenly. More than four years passed between September 2010 and January 2015 without a single rate change. In the five years from 2015 to 2020, there were ten rate changes. Between July 2017 and October 2018, a period of 15 months, there were five rate hikes that increased prime rates by 1.25%.

Borrowers looking to get a variable rate mortgage should expect and prepare for at least one rate change during a 5-year term. Desjardins predicts that the prime rate will be between 3.20% and 5.20% by the end of 2024, quite a large distance from the 2.45% prime rate in 2021. If the Bank of Canada continues to use their usual 0.25% jumps, then it's expected that there will be between three and eleven rate hikes over the next three years.

What is a variable APR?

A mortgage’s annual percentage rate (APR) adds in any additional costs of your mortgage and then turns it into an annual rate. This allows you to consider any other fees that you have to pay besides just your mortgage interest. If there is no other cost, then a variable mortgage rate would be the same as the APR.

For example, TD shows a variable mortgage rate’s APR along with the posted variable mortgage rate. In their APR calculation, they consider a $300 home appraisal fee for a mortgage with a 25-year amortization. For a $300,000 mortgage with a 5-year term, this adds 0.02% on top of your variable mortgage rate. For TD's posted 5-year variable mortgage rate of 1.55%, the APR is 1.57%.

Do credit unions provide variable rate mortgages?

You can get variable rate mortgages from many credit unions in Canada, both big and small. This includes Canada’s largest credit unions, such as Vancity, Meridian Credit Union, Servus Credit Union, and Conexus Credit Union.

Credit unions generally have the same prime rates as the major banks, but they can be more flexible in their qualifying criteria, offer a lower variable rate, or have member benefits that can reduce your rate, such as through profit-sharing programs.

How do I get the best rate for a variable mortgage?

Comparing variable mortgage rates is a great way to see which lenders are offering competitive variable rates. You can then negotiate with your lender or use a mortgage broker to try to get a lower variable rate. It’s important to remember that you might not be able to get a low posted variable rate that you saw online, which may only be available for specific conditions, such as for insured high-ratio mortgages. A bank’s prime rate is also for a bank’s prime customers. If your financial situation isn’t great, such as if you have bad credit, then you may find that variable mortgage rates offered to you might be higher.

The absolute lowest variable mortgage rate might not always be the best option either. If you need specific features, such as prepayment privileges or mortgage portability, then you need to make sure that your mortgage lender has such options. Otherwise, a low variable mortgage rate might be cancelled out through mortgage penalties.