The bank prime rate informs variable rates — what is it now?
Canada's bank prime rate is currently 4.45%.
The bank prime rate, a floating rate, follows changes made to the Bank of Canada benchmark rate. Prime is expected to rise in the near term, as higher oil prices increase inflation risk amid already complicated geopolitical conditions (e.g. U.S. international trade and tax policies).
How far variable rates might rise is still unclear. If oil prices decline because Middle East hostilities end and U.S. trade disruption slows Canada's economic growth, prime rates may stabilize.
However, prime rates could continue to rise into 2027 driven by the combined impact of inflationary pressures on ballooning U.S. and global debt.
What are some benefits of a variable rate?
Although this rate type carries mortgage budget risks if rates rise, it can deliver greater savings and benefits when rates fall or hold steady.
The best advertised variable rates are typically lower than fixed rates on any given day (e.g. during 'normal' times versus during a pandemic fallout) and carry some 'historical' savings weight, making them a favoured choice for less risk-averse mortgage borrowers.
Some variable-rate benefits are:
A better rate. A 5-year variable rate is usually lower than a 5-year fixed rate.
Instant budget relief. If you have an adjusting-payment variable mortgage (ARM), each Bank of Canada rate drop lowers your mortgage payment (it may take a full month cycle after a rate drop for the full payment effect). If you have a fixed-payment variable mortgage with a big bank (VRM) — instead of your payment dropping after a rate cut, your amortization starts ticking down as more of your mortgage payment goes to principal instead of interest.
Netting out savings during the rate ride. Prime rates may rise and fall during your term, but you may still come out ahead and save.
Long-term savings. A variable rate tends to save homeowners more over the life of a mortgage.
Flexibility to lock into a fixed rate. Feeling nervous? At any time during your variable-rate term, most lenders will let you switch to a fixed rate, penalty-free (check with your lender).
Lower penalty if you need to break. If you need to move or decide to buy another primary home and have to break your current mortgage term, a variable rate carries only a 3-month interest penalty, compared with higher fixed-rate penalties.
What are some risks of a variable rate?
The main risk of having a variable-rate mortgage is a rising prime rate, which can:
- Increase your mortgage payments if you have a floating-rate mortgage
- Increase your amortization if you have a fixed-payment mortgage
- Throw your budget off kilter, allowing less room for other payments, expenses, or savings
For a fixed-payment variable-rate mortgage with a big bank, the risks can pile on as the prime rate rises. For example, if you don't request a higher payment as rates rise, your amortization can extend out of control, resulting in a severe payment shock at your next renewal and threatening your homeownership goals. Your mortgage contract also contains a 'trigger clause' that allows the bank to force your payment higher, whether you have the budget room or not, if it no longer covers the higher interest costs.
An extreme example of variable-rate risk was seen post-pandemic.
Variable mortgage rates increased by the equivalent of 19 Bank of Canada rate hikes (0.25% increments) from March 2022 to June 2024, which quickly pushed the prime rate from 2.45% to 7.20%. It was a global economic anomaly driven by high inflation stemming from pandemic-related trade disruptions (an economic state which many hope never to see again).
During this stressful period, many True North clients switched to a fixed rate, though likely a higher rate than they would have paid if they had chosen fixed at the beginning of their term — unless they triggered the change before rates really went up.
The prime rate eventually declined to normal levels, once again offering variable-rate mortgage borrowers a savings advantage.
See our Historical Mortgage Rates here
Could variable mortgage rates fall soon?
With prime rates sitting about midway on the historical average, True North Mortgage CEO Dan Eisner agrees with many economists that Canada's economy would have to weaken significantly from trade disruption, along with easing global inflation risks, for prime rates to enter another downward cycle.
What is a variable rate discount?
When you choose a variable rate, you'll notice it's expressed as a reduction off the prime rate (e.g. P -0.85%) or a premium above it (P +1.0%).
This discount off prime, or prime plus, is how lenders compete for your mortgage dollars, and it can vary by lender and product type (e.g. an insured mortgage vs uninsured mortgage). The size of a variable discount can also depend on mortgage application details, such as income source and credit score.
A word of caution — a larger variable discount may hide other charges intended to make up for an ultra-low-rate deal, like a more expensive monthly vs. semi-annual compounded rate.
Does your variable rate discount change during your term?
Once you lock into a variable-rate mortgage, your discount or addition to prime doesn't change.
Your mortgage rate will rise or fall along with the prime rate. But the amount-off or plus-prime relationship stays the same.
If you're considering a variable rate, could the advertised discount shrink?
Yes, if you haven't locked in your pre-approval rate, a lender can change its lowest advertised discount rate for a 5-year variable rate when you go to buy a home or renew your mortgage (not mid-term if you already have a mortgage).
These discount fluctuations usually reflect competition with other banks or can depend on whether tighter federal regulations will raise lender costs by requiring them to hold more capital, prompting them to lower their variable-rate discount.
If you get a rate hold, your discount is usually safe during the specified hold period (which can differ by lender or product).
Are variable rates lower than fixed rates?
Yes, today they are. But in fact, this normal spread relationship has only recently returned. When prime rates rose quickly post-pandemic to a 22-year high between 2022 and 2024, variable rates were above fixed rates — an unusual state (we called it the rate upside-down).
Variable rates are typically 0.25 to 1.0% below the 5-year fixed rate. During the pandemic, as the prime rate fell quickly in response to the economic crisis while fixed rates remained stable, this spread widened to around 1.5%.
A 'normally' lower variable rate compared to a fixed rate is a primary reason homeowners choose this rate type, which can help them save more on their monthly mortgage payments.
