Variable mortgage rates are finally dropping.
So why aren’t they more popular?
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, a top Canadian brokerage for over 18 years, explains why he feels more of their clients aren't opting for a declining variable rate.
"Homeowners 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 2- or 3-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 policy rate cut, variable rates went lower but are still higher than a competitive 5-year fixed rate deal of 4.34%.
Using a mortgage of $500K with a 25-year amortization as an example — let's say you choose a variable-rate mortgage right now that offers 5.25% (after the lender's discount off prime), and the prime rate drops another 1.25% a year or so into your 5-year term. Compared to locking in with a current 5-year fixed rate of 4.34%, the savings could be at least $2,500.
That $2,500 is money that could be spent elsewhere rather than on your mortgage. However, these potential savings may not be enough to sway you or other homeowners from the relative safety of fixed rates and payments.
If the prime rate drops even further than this prediction? That's a perk of the variable rate risk — you'd save even more. And, with Mississauga home prices typically being more expensive than many Canadian markets, if your mortgage amount is higher than the example provided, the more the savings could add up.
Homeowners are wary of variable rates.
According to True North Mortgage, so far in 2024, despite the anticipation of prime rate drops, their clients have favoured the standard 5-year fixed rate more than usual vs. the variable rate choice.
The 3-year fixed rate has also remained popular — about 33% of their clients chose this rate in July 2024.
During 'normal' economic times, about 60% of clients usually choose a 5-year fixed rate vs. about 30% for variable; a 3-year rate might be selected by roughly 7% of clients.
Note: Mortgage stats based on all lenders True North's clients were placed with, including in-house CMHC-approved lender, THINK Financial.
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 in less than a year.
And they could go lower after that — current predictions peg a total decline of at least 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 float or to fix, which rate shall it be?
When figuring out your best rate path during a period of economic volatility to decide on a floating variable or to lock into a fixed rate — you'll need to consider your risk preference, budget flexibility, and homeowning goals.
Spend some time with a good mortgage calculator or mortgage broker to see what numbers you're comfortable with over the next few years. If you only check rates with your bank, be aware that you may not get the most competitive rates available, which can impact your payments and budget room.
Choosing a fixed rate over a variable may mean you sleep restfully at night, knowing that your fixed-rate mortgage payments are manageable enough to say "I can live with that," until your next renewal. You may even decide on a shorter-term fixed rate that allows you the option to choose a lowered variable rate sooner than waiting out a 5-year fixed rate.
Or perhaps you have the budget flexibility to ride a variable rate as they go lower, knowing you can (typically) lock into a fixed rate penalty-free if you get worried.