Despite potential savings in sight, most homeowners are still avoiding this rate type. Here’s why.
To be in a variable-rate mortgage, or not to be? That’s the existential (mortgage) question for Canadians considering their best rate move for their first or next term.
So far, the answer is mostly ‘thanks but no thanks,’ despite the real potential for a 5-year variable mortgage rate (that floats with changes to bank prime rates) to go lower during its term than any fixed mortgage rate locked into today.
(Mortgage) money talks
Dan Eisner, founder and CEO of True North Mortgage, explains why he feels more clients aren’t opting for a declining variable rate.
“Clients tend to look at the mortgage math for the immediate impact on their monthly budget,” remarks Dan. “With most fixed rates offering a much lower mortgage payment than a still-higher variable, those are winning the day versus trying to predict where variable rates will go.”
Dan reports that only about 14% of their mortgage clients in 2024 have chosen variable rates so far, compared to about 68% taking 3- or 5-year fixed rates. Back in November 2023, when prime rate drops were thought to be imminent, about 37% chose variable.
Once bitten, twice shy
It’s not just the reluctance to disregard the fresh ‘mortgage’ memory of enduring several variable rate hikes over the past couple of years; it’s also that the rate drops took much longer to start than anticipated, with the first cut not arriving until June 2024.
“By this June,” Dan says, “even the diehard variable fans were starting to choose fixed rates and shorter-term options, such as our 6-month Rate Relief® product or 1- or 2-year deals, to wait a bit longer on what interest rates might do.”
In addition to this variable rate ‘aversion’? Fixed rates are currently lower, making any future variable savings perhaps not quite tempting enough.
How much could a variable rate save you?
With the recent Bank of Canada rate cut, variable rates went lower — but are still higher than True North’s best 5-year fixed-rate deal of 4.44%.
If you choose a variable-rate mortgage right now that offers 5.25% (after the lender's discount off prime), let’s say the prime rate drops another 1.25% a year or two into your 5-year term. Compared to locking in with a current 5-year fixed rate of 4.44%, the savings could come to over $2,800.
That $2,800 is real money that can be spent elsewhere rather than on your mortgage. However, it may not be enough to sway people from the relative safety of fixed rates and payments.
What if the prime rate drops even further than that prediction? That’s a perk of the variable rate risk — you’d save even more.
Does a variable rate come with other benefits?
A variable-rate mortgage offers other advantages, like the flexibility to lock into a fixed rate at any time, penalty-free.
And you’ll pay a lot less in penalties than a fixed rate if you switch lenders for a better rate or product or because you need to move. (Fixed-rate mortgages incur IRD charges, which can cost thousands more than the 3-month interest penalty of a variable rate.)
Think you won’t need (or want) to break your 5-year fixed mortgage? It happens more often than you think; this term length averages about 3.89 years due to homeowners making a change.
When will variable rates be on par or lower than today’s fixed rates?
If prime rate predictions are correct, variable rates could be on par with today’s 5-year fixed rates within a few months.
And they could go lower after that — current predictions peg a total decline of 2.0% from peak prime, which would land variable rates about half a percentage lower than today’s best 5-year fixed rates by the end of next year.
During ‘normal’ times (aka when the economy is not dealing with the aftermath of pandemic recovery), 5-year variable rates are typically lower than 5-year fixed rates by about 0.25% to 1.0%.
To bind or be free, which rate shall it be?
When figuring out your best rate path — locking in a fixed rate or going with a floating variable — the experts at True North offer personalized and unbiased advice tailored to your unique situation.
They’ll help you consider your risk preferences, budget flexibility, and homeowning goals. And make sure you get your best possible rate, whether it’s your first home, your next one, or you need to renew or refinance.
Have a read through their volumes of 5-star reviews, where happy clients wax poetic about how much money, time, and stress they saved — and you could be next.
Get free, expert advice from a highly trained True North mortgage broker in your preferred language. You could save thousands with a simple ‘hello’ — online, on the phone, or in-store. Contact Canada's No. 1 Mortgage Broker today.