Find the best 3-year variable mortgage rate

Mortgages in Canada come in all shapes and sizes - just like Canadians! While that's great for potential homeowners, it can also make comparing mortgages confusing. Our goal is to make it simple to compare mortgage rates, terms, and conditions, to empower you to make the best choice. Read on to learn more about 3-year variable-rate mortgages, one of the more flexible options in the mortgage market. 

3-year variable mortgage rates: Quick facts

• Mortgage rate fluctuates over a 3-year term
• Just 0.6% of all mortgage requests made on Ratehub.ca from January to December 2023 were for 3-year variable mortgages
• According to Mortgage Professionals Canada, 25% of Canadian mortgage-holders had variable-rate mortgages at the end of 2022
• 3-year variable mortgage rates follow the prime lending rate

3-year variable mortgage rate explained

A 3-year variable mortgage rate is simply a variable mortgage rate that you commit to for a 3-year period. Being a short term with a variable rate, it is one of the more flexible mortgage products in Canada.

Variable mortgage rates - sometimes referred to as adjustable mortgage rates - follow changes in the prime lending rate. The prime rate is the standard rate at which banks lend to creditworthy customers. Variable mortgage rates are typically stated as a discount or premium (+/-) to prime. For instance, if the prime lending rate is 3% and your variable mortgage rate is prime plus 0.5%, your effective rate will be 3.5%. As the prime rate changes, your effective rate will change too.

A 3-year variable mortgage rate commits you to this arrangement for a term of three years. For those three years, your rate will stay locked to prime by the agreed upon amount, and you'll be committed to the other contractual provisions with your lender.

Generally, variable rates are lower than fixed mortgage rates of the same term. This is because fixed rates buy you protection against interest rate instability. Conversely, variable rates are riskier than fixed rates, so there are pros and cons. At the end of 2022, we find ourselves in an unusual situation where variable rates are actually higher than fixed rates as a result of the Bank of Canada raising the target for the overnight rate throughout the course of the year. Many experts predict that the Bank of Canada will not raise rates further in 2023, meaning that variable rates may have plateaued, and could start to come down in 2024. 

Comparing 3-year variable mortgage rates

Variable mortgage rates expose you to changes in interest rates and, thus, in your mortgage payments. If market rates fluctuate, you will be charged the difference in interest applied to your mortgage principal. Further, if your mortgage payments are structured so you pay a fixed amount every month – with rate changes altering the interest and principal portions – then your mortgage payment schedule may also be affected.

On the other hand, variable mortgage rates have proven to be less expensive compared to fixed rates when examined historically, and they particularly make sense in falling interest rate environments.

The 3-year term is sensible if you foresee breaking your mortgage within a few years – if you were planning to upgrade your home, for instance. Opting for a 3-year term over, say, a 5-year term could save you a considerable amount in penalty costs.

Another point to consider is a variable rate’s relationship to prime: if you believe discounts to prime will become more favourable in the future, committing to a 3-year over a 5-year mortgage rate is also a sound strategy.

3-year mortgage rates vs. 5-year mortgage rates (interactive graph)

The popularity of the 3-year variable mortgage rates

While 5-year terms are the most common duration amongst all Canadians, younger Canadians are more likely to gravitate towards mortgage terms of between two and four years. As is typical with younger demographics, the tolerance for risk is likely higher, with a reduced urgency to lock in rates for longer periods of time. Variable rates, comprising 25% of all Canadian mortgages at the end of 2022, are not as popular as fixed mortgage rates in Canada, due to the uncertainty associated with fluctuating interest rates.

What drives changes in 3-year variable mortgage rates?

The Bank of Canada plays a key role in determining variable mortgage rates. The Bank of Canada sets the overnight rate, which is the base for lenders’ prime rates.

Variable mortgage rates, as you know, are quoted by lenders in terms of their relationship to the prime rate.

The premium or discount a lender applies to prime in calculating a variable mortgage rate is based on independent marketing strategy and general credit market conditions.