Find the best 3-year variable mortgage rate in Ontario

• Mortgage rate fluctuates over 3-year term
• 20% of Canadians have mortgage terms between 2-4 years¹
• 29% of Canadians have variable mortgage rates²
• 3-year variable mortgage rates follow the prime lending rate

3-year variable mortgage rate defined

Variable mortgage rates, sometimes referred to as adjustable mortgage rates, follow the prime lending rate, which is the rate at which banks lend to their most 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 a variable mortgage rate is stated as a .5% premium to prime, the effective rate will be 3.5%.

A 3-year variable mortgage rate will absorb changes in interest rates over a term of three years. The term is the length of time you are committed to this link with the prime rate and other contractual provisions with your lender. Generally, variable rates are lower than fixed mortgage rates of the same term because fixed rates buy you protection against interest rate instability.

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 – like, if you were 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 short-term, committing to a 3-year over a 5-year mortgage rate is also a sound strategy.

Popularity of the 3-year variable mortgage rates

Around 20% of Canadians have mortgage terms between two and four years, with younger age groups supporting a slightly higher figure. Compared to older demographics which tend to be more risk averse, the younger demographic has a reduced urgency to lock in rates for longer periods.

Variable rates, at 29% of all mortgages, are not as popular as fixed mortgage rates in Canada predictably 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 rate.

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.

References and Notes

1. Annual State of the Residential Mortgage Market in Canada, CAAMP, 2010
2. Annual State of the Residential Mortgage Market in Canada, CAAMP, 2010
3. Annual state of the Residential Mortgage Market in Canada, CAAMP, 2010