The bank prime rate informs variable rates — what is it now?
Canada's bank prime rate currently stands at 4.45%.
The bank prime rate (a floating rate) is expected to remain stable in the near term, as recent higher oil prices heighten inflation risk on top of already delicate economic projections.
The prime rate follows changes made to the Bank of Canada benchmark rate, and is projected to hold through much of 2026, with the potential for a rate hike later this year or early next year if inflation heats up.
However, variable rates could still decline this year if the economy softens from U.S trade disruption or higher energy prices eat deeper into consumer demand.
What are some benefits of a variable rate?
Variable rates are based on Canada's bank prime rates, a floating rate which in turn tracks movements in the Bank of Canada policy rate. Bank prime rates currently stand at 4.45%.
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), with each variable rate drop by the Bank of Canada, your mortgage payment drops (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 the 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 on the side of savings.
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 allow you to 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 home to live in and have to break your current mortgage term, a variable rate carries only a 3-month interest penalty, compared to 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, 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 pushed the prime rate to a 22-year high. It was a global economic anomaly driven by high inflation stemming from pandemic-related trade disruptions, which many hope never to see again.
During this stressful financial period, many True North clients switched to a fixed rate, though likely a higher one 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.
Thankfully, the prime rate has since declined to normal levels, once again offering its savings advantage (yet the risk still remains).
Do variable rates still have room to fall?
With variable rates sitting about midway on historical average, True North Mortgage CEO Dan Eisner agrees with many economists that the prime rate will only fall again this year if Canada's economy weakens significantly from trade disruption or if demand plummets due to higher energy prices.
However, if inflation rises too fast, that could drive the prime rate higher this year or next.
There are a lot of 'ifs' and 'ands' right now, and rate forecasts are subject to change as economic conditions remain volatile.
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%).
This discount off prime is how lenders compete for your mortgage dollars, and it can vary among lenders. The size of a discount offered to a borrower can depend on mortgage application details, such as income source and credit score, as well as whether the mortgage is insured or uninsured.
A word of caution — a larger variable discount may hide other costs that are charged to make up for that 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 doesn't change.
Your mortgage rate will rise or fall along with the prime rate. But the discount itself remains intact.
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 are usually based on competition with other banks or whether tighter federal regulations will raise 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).
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 post-pandemic to a 22-year high between 2022 and 2024, variable rates were above fixed rates, which is an unusual state (we called it the rate upside-down).
Variable rates are usually lower than the 5-year fixed rate by a spread of 0.25 to 1.0%. During the pandemic, as the prime rate quickly lowered in response to the economic crisis, this spread increased to around 1.5%.
A 'normally' lower variable rate compared to a fixed rate is a primary reason homeowners choose this rate type, which helps them save on their monthly mortgage payments.
