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Jamie David, Business Director Mortgages
5-year variable mortgages are a common type of mortgage in Canada. With variable rates presenting more risk than fixed rates, it’s especially important to find the best possible deal. Ratehub.ca helps you compare rates from Canada’s leading banks, brokers, and other lenders, at no cost to you.
Read on to learn more about 5-year variable rates, or click here to learn what rates could be available to you, in just a couple of minutes.
What are 5-year variable mortgage rates?
A variable mortgage rate fluctuates with the market interest rate, known as the 'prime rate', and is usually stated as prime plus or minus a percentage amount. For example, a variable rate could be quoted as prime - 0.8%. So, when the prime rate is, say, 5%, you would pay 4.2% (5% - 0.8%) interest.
The term, which is five years in the case of a 5-year variable mortgage, is the length of time you are committed to a variable type rate and, sometimes, the mortgage payments. With a variable rate, your mortgage payments can be set up one of two ways: a set payment, with the interest portion fluctuating; or, a fixed sum applied to the principal with the fluctuating interest portion changing the overall mortgage payment. For example, in the case of the former, if interest rates go down, more of the mortgage payment is applied to reduce the principal, but the total outlay remains the same.
The term of the mortgage should not be confused with the amortization period, which is the amount of time it takes to pay off your mortgage. So, in the example above, if the principal is reduced more quickly when interest rates fall, then the amortization period is reduced as well.
How much can I save comparing 5-year variable rates?
Your mortgage will probably be the biggest financial decision you ever make, and a lower rate can save you thousands of dollars, even in the short term. Even a slightly lower mortgage rate can result in big savings, especially early on in your mortgage.
For example, on a $450,000 mortgage with a 25 year amortization period, a rate of 3.25% would see you pay $67,730 interest over 5 years. With a 3.00% rate you’d pay $62,412 interest over the term. So, a difference of just 0.25% can save you $5,318 over your 5-year term (Source: Ratehub mortgage calculator).
Why compare 5-year variable rates with Ratehub.ca?
We make it simple to see current mortgage rates from all of Canada’s leading mortgage providers in one place. We have rates from the big banks, smaller lenders, as well as mortgage brokers across the country. This makes it easy to see who offers the best rates in Canada in real time, at no cost to you.
What are the pros and cons of variable 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.
Is 5 years the best variable term length?
Not necessarily. Variable rates are offered on mortgages of different term lengths, though generally 3 or 5 years. 5-year variable rate mortgages typically have lower interest rates, which is obviously a big positive, but there are other factors that might make a 3-year variable rate a better option.
The 3-year term is sensible if you foresee breaking your mortgage within a few years – if you were to upgrade or sell your home, for instance. Opting for a 3-year term over 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 short-term, committing to a 3-year over a 5-year mortgage rate is also a sound strategy.
Popularity of 5-year variable mortgage rates
Although fixed rate mortgages are more popular (74%), 21% of mortgages have variable and adjustable rates (Source: <ahref="https: www150.statcan.gc.ca="" n1="" pub="" 75-006-x="" 2019001="" article="" 00012-eng.htm"="">Statistics Canada). Fixed rates are also slightly more common for the youngest age groups, while older age groups are more likely to opt for variable rates (Source: CAAMP).</ahref="https:>
The 5-year term, conversely, is the most common duration. This is logical given that five years is the median between the available term lengths between one and ten years.
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 competition, strategy, and desired market share.
Jamie David is the Business Director of Mortgages at Ratehub.ca. A graduate of the Systems Design Engineering program at the University of Waterloo, she has over 15 years of business, marketing, and engineering experience in the financial technology, banking, education, energy and retail industries. She has worked in top organizations like TD Bank, Trading Pursuits, Petro-Canada, and the TTC. Her passion for personal finance, investing, education, and business strategy brought her to Ratehub.ca where she heads a very talented, cross-functional team that is dedicated to providing Canadians with the best mortgage experience all the way through from online search to (keys-in-your-hand) funded mortgage.
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