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Best 5-year variable mortgage rates

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5-year variable rates: Frequently asked questions

What is the best 5-year variable rate in Canada?


How much have variable rates increased in 2022?


Why are variable rates going up so much in 2022?


Should I switch my variable-rate mortgage to a fixed-rate mortgage because the prime rate keeps increasing?


Will variable rates continue to go up in 2022?


What impact do rising variable rates have on the stress test?


WATCH: How to Choose Between Variable or Fixed in 2022

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A guide to 5-year variable mortgage rates

Jamie David

October 26, 2022 Update:

  • On October 26, 2022, the Bank of Canada increased the key overnight rate by 0.50%. The target for the overnight rate is now 3.75%. 
  • Canadians with variable-rate mortgages and home equity lines of credit (HELOCs) will see their rates rise accordingly by 0.50%. They should calculate what their new mortgage payment will be and budget for more increases to come this year.
  • As rates rise, so does the mortgage stress test. With today's announcement pushing variable rates up by 0.50%, anyone who is getting a new variable-rate mortgage will need to pass a stress test that is 0.50% higher. To calculate how much you can qualify for, use our mortgage affordability calculator.
  • While the Bank made it clear that further rate hikes will be necessary to get inflation under control, it did say that it expects inflation to come down to 3% by the end of 2023. This suggests that the end of rising rates may be in sight if the Bank feels that inflation has been controlled sufficiently. When inflation drops, the Bank may drop rates, reducing the cost of a variable-rate mortgage. 

Best 5-year variable mortgage rates +

5-year variable mortgage rates: Quick facts

  • Mortgage rates fluctuate with the prime lending rate.
  • Variable rates are typically stated as "prime plus or minus a percentage".
  • 22% of Canadians had variable mortgage rates in 2020. (Source: Mortgage Professionals Canada)
  • 17% of all mortgage requests made to Ratehub.ca in 2021 were for 5-year variable-rate mortgages, a 50% increase over 2020.
  • 5-year mortgage rates are driven by 5-year government bond yields.

Historical 5-year variable mortgage rates

Checking historical mortgage rates is a great way to properly understand which mortgage terms attract lower rates and whether rates are especially high or low at any given moment. Here are the lowest 5-year variable rates of the year in Canada for the last several years, compared to several other types of mortgage rates.

Source: Ratehub Historical Rate Chart

 

The popularity of 5-year variable mortgage rates

Although fixed-rate mortgages are more popular, 22% of Canadian mortgages have variable and adjustable rates (Source: Mortgage Professionals Canada), making it the second most popular type of mortgage. Fixed rates are slightly more common for the youngest age groups, while older age groups are more likely to opt for variable rates (Source: CAAMP).

Historically, fixed rates are generally more popular, however, in the wake of the COVID-19 pandemic, the Bank of Canada cut its target overnight lending rate in March 2020, which caused the prime rate to go down. As a result, variable rate mortgages are experiencing a surge in popularity; the number of new homes purchased in 2020 with variable-rate mortgages was 50% higher than in 2019. 

A 5-year mortgage term is the most popular duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average. It also tends to be heavily promoted by major lenders. A further breakdown of mortgage terms shows that about 80% of mortgages have terms of five years or less.

What drives changes in 5-year variable mortgage rates?

As previously mentioned, the 5-year variable mortgage rate will fluctuate with any movements in the prime lending rate, which is the rate at which banks lend to their best and most credit-worthy customers. The variable mortgage rate is typically stated as prime plus/minus a percentage discount/premium.

Canada’s prime rate is influenced primarily by economic conditions. The Bank of Canada adjusts it depending on the state of the economy, determined by various factors in employment, manufacturing, and exports. Together, these shape the inflation rate. When inflation is high, the Bank of Canada must act to avert an over-stimulated economy. They will increase the prime rate to make the act of borrowing money more expensive.

Conversely, in cases where inflation is low, the Bank of Canada will decrease the prime rate to stimulate the economy and improve the attractiveness of borrowing. The discount/premium on the prime rate applied to the variable mortgage rate is set by the banks, based on their rate strategy and desired market share. 

Historical 5-year variable, 5-year fixed, and BoC target overnight rate 

The bottom line: Should you get a 5-year variable rate?

As long as you're comfortable with risk and understand that variable rates can fluctuate throughout your term, then a 5-year variable rate is a reasonable choice. Since variable rates do have the inherent risk of rate increases, make sure you have enough money in your budget to cover a higher mortgage payment if rates increase.

If you're still not sure about what mortgage product is right for you, it's a good idea to speak to a mortgage broker. Consultations are free, and you'll leave with expert advice, personalized to you.

 

For more information, check out these helpful pages! 

Jamie David, Director of Marketing and Head of Mortgages

Jamie has 15+ years of business and marketing experience. She contributes her mortgage expertise to The Globe and Mail and authors Ratehub’s mortgage and homebuying guides. read more

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