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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% interest (5% - 0.8%).
The term (which is five years in the case of a 5-year variable mortgage) is the length of time you're committed to a variable rate with your current lender. With variable rates, your mortgage payments can be set up in one of two ways:
- A set regular payment, which is known as a “true” variable rate mortgage, or VRM. This is also known as a fixed payment.
- A fixed amount applied to the principal, with the fluctuating interest portion changing the overall mortgage payment, which is known as an adjustable rate mortgage, or ARM. This is also known as a floating payment.
For a VRM, if interest rates go down, more of your payment is used to reduce the principal, but the total monthly payment remains the same. If interest rates go up, less of your payment will go towards the principal. If, like most Canadians with variable-rate mortgages, you have an ARM, your monthly payments will fluctuate along with interest rates.
The term of the mortgage should not be confused with the amortization period, which is the total amount of time it takes to pay off your mortgage. In the example of a VRM 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 be one of the biggest financial decisions you ever make, and a lower rate can save you thousands of dollars. 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 5 years. So, a difference of just 0.25% can save you $5,318 over your 5-year term (Source: Ratehub Mortgage Payment 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 credit unions 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?
There are pros and cons to choosing a variable mortgage rate, and we’ll walk you through each below. Some of the pros of a variable mortgage are:
- Cheaper over time: According to York University Professor Moshe Milevsky’s landmark 2001 study, historically, over 90% of Canadians who have maintained a variable mortgage rate throughout their entire mortgage term have paid less in interest than those who have stuck to a fixed rate.
- Greater flexibility: You can convert a variable rate to a fixed rate at any time without a penalty as long as you stay with your original mortgage lender.
- Lower breakage penalties: Breaking a variable rate mortgage can often be substantially less expensive than breaking a fixed rate mortgage. If you have a variable rate mortgage, the penalty will always be three months’ interest. However, with a fixed rate mortgage, your penalty is calculated as either three months’ interest or the interest rate differential (IRD), whichever is greater. To estimate the cost of breaking your mortgage, our mortgage penalty calculator is a useful tool.
On the flip side, you need to consider the con:
Financial uncertainty: If rates increase, so will your payments. If you have an adjustable rate mortgage (ARM), your monthly payments will increase. Even if you have a “true” variable rate mortgage (VRM), more of your payment will go towards interest rather than the principal, which will extend the life of your mortgage. If you prefer to be able to plan your finances precisely, this is the biggest drawback of a variable-rate mortgage.
What is the best 5-year variable rate mortgage for me?
Generally, a variable-rate mortgage is a good choice if you can tolerate risk and don’t mind keeping an eye on the market to see how it’s affecting your monthly mortgage payments. In addition to the actual mortgage rate, you’ll want to consider some other factors when shopping around for the right 5-year variable rate mortgage for you.
- Pre-payment options: Take a look at what pre-payment options your lender is willing to offer you. The more flexible your lender is with prepayment options, the faster you can pay off your loan, which saves you thousands of dollars in interest fees. The main prepayment options are monthly prepayment and lump sum prepayment. In the case of the former, you’re allowed to increase your monthly payment up to a certain percentage determined by your lender, maxing out at 100%. For example, if you had a lender who allowed you to double your monthly payments, you could pay your mortgage off in half the time. The latter option, lump sum prepayment, allows you to pay off a certain percentage of your mortgage loan, with the maximum allowed amount depending on your lender’s terms and conditions.
- Porting policy flexibility: If you need to sell your home before the end of your mortgage term, many lenders will allow you to port your mortgage. Porting a mortgage means to take your current mortgage with its existing rates and terms and transfer it to another property, and allows you to avoid breaking the mortgage. You’ll want to talk to your lender about how portable your mortgage is, particularly if you think you may need to move before your term is up. Not all mortgages are portable, and many that are portable have conditions attached that you should be aware of.
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.
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