Here's a reminder of variable-rate benefits.
After the equivalent of 19 rate hikes (0.25% increments) since March 2022, the narrative has shifted back to the benefits this rate type offers during a period of declining rates:
- Instant budget relief with each variable rate drop by the Bank of Canada —if you choose an adjusting-payment variable mortgage (ARM).
- Your amortization reduced with each rate drop, helping you pay off your mortgage faster — if you have a fixed-payment variable mortgage with a big bank (VRM).
- Historically, a variable rate tends to save homeowners more over the life of a mortgage.
- Most variable-rate products allow you to lock into a fixed rate at any time, penalty-free.
- If you need to switch lenders mid-term, you'll pay less penalty than a fixed-rate mortgage.
How fast (or far) might variable rates fall?
Right now, a 5-year variable rate is higher than most fixed-rate terms. But if prime rates are coming down — a variable rate may go lower during your term compared to a fixed rate you might lock into now or over the next few months.
Some financial experts think prime rates (which variable mortgage rates are based on) will fall by 1.0% in 2024. Others, like True North Mortgage CEO Dan Eisner, predict prime rates might be 1.5% lower by year-end.
Regardless of how fast they do end up declining — in total, over the next couple of years, prime rates are expected to come down by at least 2.0, resting around 5.20% from a current prime rate of 7.20% (which doesn't include lender discounts). That's a total of at least 8 rate drops (0.25% increments).
If we hit a recession, variable rates will come down faster. If we rack up even higher inflation, the decline rate may be impeded or halted for a period.