The prime rate is shifting downward, which may be hurried along amid a tariff war. Is now the right time to choose a variable rate over a fixed rate?
Let's weigh the mortgage savings vs. risk to help you decide.
Prime rates — and, therefore, variable rates — are on the decline.
And now, with a trade war at hand, prime rates are likely to head lower in 2025 than originally forecast (tied to Bank of Canada policy rate movements).
Does that mean you should choose a variable rate over a fixed rate?
Despite enduring the fastest interest rate rise in over 23 years (from 2022 to 2024), many are 'over' their aversion to a floating variable mortgage, and home buyers and owners are weighing their rate choice carefully this year:
Let's explore the variable rate's potential for added mortgage savings it could bring over your next term.
Unless you've been up in the attic doing some home maintenance, you're likely aware that Canada is in the midst of a trade war with the U.S.
Read more about how U.S. President Trump's trade tariffs could alter the path of mortgage rates in 2025, and keep up with real-time forecasts in our 2025 Rate Forecast blog.
Despite suffering the equivalent of 19 rate hikes (0.25% increments) between March 2022 and June 2024, the narrative has suddenly shifted back to the benefits this rate type offers during a period of declining rates:
Your variable rate reflects the discount off prime your lender offered for your contract rate, which stays put for your 5-year term.
Bank prime rates have already dropped 2.25% from the peak of 7.20%.
With a continuing trade war — or settling on increased U.S. tariffs for certain Canadian goods — True North Mortgage CEO Dan Eisner predicts prime rates might fall by another 2 to 5 rate cuts, from a current BoC policy rate of 3.0% to at least 2.25% by the end of 2025 (for a prime rate of least 4.45%, assuming the current spread with the policy rate of +2.20%).
Before tariffs, markets had expected another two prime rate cuts this year. Economic conditions are expected to be volatile this year, grappling with politically charged aspects that could impact the Canadian economy, both in the near and far term.
(In a tougher economic environment — such as a tariff-triggered recession — variable discounts offered for renewals or home purchases may shrink as lenders deal with increased operating costs.)
The amount variable rates could fall during your term would (obviously) affect how much you'd save vs. choosing a fixed rate right now.
You should know that variable rates are normally lower than fixed rates.
We've been living in the (rate) upside-down for the last couple of years.
Homeowners are looking at the current variable rate, and it's still higher than our best 5-year fixed rate. Typically, variable rates are lower than 5-year fixed rates by a spread of anywhere from 0.25 to 1.0% (during the pandemic, the spread increased to around 1.5%).
At some point soon, the natural (rate) order of things will reassert and variable rates will return to being lower than a 5-year fixed rate.
Assuming a $500K mortgage at 25-year amortization:
How much could you save choosing a variable rate of 4.10% (P- 0.85%) vs. locking into a 5-year fixed rate of 3.99%?
Let's suppose your variable rate drops to 3.60% (including term discount) after the first year of your 5-year term
At first, your mortgage payment with your current variable rate would be higher in the first year (for the 3.60% rate example, it would be $2,657 vs. $2,627 for the fixed), but would reverse to be $2,327 vs. $2,657 for the next 4 years assuming prime rates stay at that level.
Note: The above numbers are for illustration only. During volatile times, it may be harder to predict where interest rates might be in 5 years.
Despite the allure of declining prime rates — a variable rate isn't for everyone.
Set it, and forget it. Some homebuyers and owners, especially first-timers, prefer the set-budget strategy (aka peace of mind) of a fixed rate.
Consider your risk preference. Prime rates (directly affected by Bank of Canada rate decisions) carry the risk of rising again if inflation trends up, which may lead to 'rate regret' if you usually prefer the relative safety of a fixed rate.
Fixed rates aren't as high as they were last year. These rates have come down ahead of 'expected' prime rate declines, making it more desirable to lock into a fixed rate if you're comfortable with the mortgage payment. True North has great rate term rates available, thanks to our volume discount and access to several lenders.
According to True North Mortgage, as prime rate cuts piled up by this January, the popularity of a 5-year variable rate switched places with the (mortgage stalwart) 5-year fixed rate for being pretty darn popular.
In February 2025, here's how True North clients chose:
During 'normal' economic times, about 30% of clients usually choose a variable rate, about 60% choose a 5-year fixed rate, and roughly 7% choose a 3-year fixed rate.
Will variable rates stay in favour as tariffs impact mortgage and home-buying decisions? Stay tuned.
Note: Mortgage stats include all lenders True North's clients were placed with, including in-house CMHC-approved lender, THINK Financial.
Some may not want to lock into any 5-year rate if they think rates will go lower before then.
Choosing a shorter term. Some clients are happier with a shorter-term fixed rate, such as a 3-year deal, which may see them into lower rates sooner than a 5-year fixed might.
Or, for those buying a home or switching lenders, we offer the lowest fixed rate in Canada. Our 6-month Rate Relief™ product offers a quick budget break to help with closing costs or moving expenses while waiting to see if market rates drop further.
If variable rates are your thing, and you have decisions to make in the next while (like a possible move) or extra money you'd like to put down on your mortgage principal — open (vs closed) variable rates can offer all the flexibility you need.
However, open variable rates tend to be higher than typical rates because of the increased possibility of mortgage changes that the lender has to absorb.
We currently offer a No Committment™ mortgage with the lowest open variable rate in Canada. Read more here, and apply online or talk to us if you want to know more.
True North Mortgage consistently offers lower variable rates than the competition through its in-house lender, THINK Financial — and here's the proof.
This 3rd party stat shows that over the years, we've helped clients save more with a great rate and flexible mortgage.
Whether you choose variable or fixed, or go with our lender or another, our highly trained brokers provide unbiased advice for your best mortgage fit, in your preferred language.
You only live once (unless you have nine lives like a cat or Rick Astley), so you may as well save the most on your mortgage.
We make it easy. Our expert brokers offer you exceptional 5-star service, along with your guaranteed best rate and the right mortgage product for your needs, regardless if your details are straightforward or more complex.
We can help with your rate decisions in 2025 and beyond — anywhere you are in Canada.
We're here online, on the phone, via email, or drop by a store for friendly, in-person mortgage help.
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