Understanding 5-Year Variable Mortgage Rates

At Garth Financial, many of our clients have heard of variable-rate mortgages, though only about 29% of Canadians choose this option. Of those, the majority select a 5-year term, making the 5-year variable-rate mortgage the most common form of variable mortgage. But what exactly is a variable-rate mortgage, and what determines its interest rate?

What is a Variable-Rate Mortgage?

A variable-rate mortgage is one where the interest rate fluctuates over time. These changes are driven by the prime lending rate, also known as the market interest rate, which is influenced by the overnight lending rate set by the Bank of Canada.

The variable rate you pay is typically defined as the prime rate plus or minus a certain percentage. For example:

  • If the prime rate is 3.95% and your variable rate is prime - 1.00%, your interest rate would be 2.95%.

  • If the prime rate drops to 3.70%, your variable rate would adjust to 2.70%.

This direct connection to the prime rate allows borrowers to benefit when rates decrease, though it also means payments can increase if the prime rate rises.

Why is the 5-Year Variable Term So Popular?

For Garth Financial clients, 5-year variable-rate mortgages are a top choice because they offer:

  • Lower Penalties for Breaking the Mortgage:
    Breaking a variable-rate mortgage typically results in a penalty equal to three months’ interest, regardless of the remaining term. This is significantly cheaper than breaking a fixed-rate mortgage, where penalties are calculated using the interest rate differential (IRD) or three months’ interest—whichever is greater.

  • Prime Rate Linked to Economic Performance:
    The prime lending rate generally follows the Bank of Canada’s overnight lending rate, which is influenced by the overall performance of the economy. In a struggling economy, the prime rate tends to drop, leading to lower mortgage rates for borrowers.

How are Variable Mortgage Rates Defined?

Variable mortgage rates are expressed as prime +/- a percentage. For example:

  • Prime - 0.25%: If the prime rate is 4%, your interest rate would be 3.75%.

  • Prime + 0.50%: If the prime rate is 4%, your interest rate would be 4.50%.

Your specific rate is also determined by factors such as:

  • Property Type: Investment properties typically have higher interest rates than primary residences.

  • Credit Profile: Borrowers with poor or improving credit may face higher rates, though a shorter loan term can allow them to refinance at renewal when their credit has improved.

When Should You Consider a Variable-Rate Mortgage?

A variable-rate mortgage is a great option for:

  • Borrowers Who Expect Rates to Drop:
    If interest rates are falling, a variable-rate mortgage lets you take advantage of rate decreases without the need to refinance or pay penalties.

  • Short-Term Homeowners:
    If you plan to move within the next few years, a variable-rate mortgage with a shorter term can offer flexibility and lower penalties if you need to break the mortgage early.

  • Borrowers Seeking Flexibility:
    With a variable-rate mortgage, you can often convert to a fixed-rate mortgage at any time without penalties, making it easy to lock in a stable rate if interest rates start to rise. However, the reverse is not true—you cannot switch from a fixed to a variable mortgage without incurring penalties.

How Can Garth Financial Help You Find the Right Mortgage?

At Garth Financial, we understand that every borrower’s situation is unique. Variable-rate mortgages can be appealing due to lower penalties and the potential for savings when rates drop, but other factors, such as lender fees and risk assessments, also play a role.

We help you:

  • Compare Lenders: Some lenders may offer lower rates but charge higher fees, while others assess risk differently, leading to rate variations.

  • Understand Your Options: We’ll explain the differences between fixed and variable rates, penalties, and the factors that influence your interest rate.

  • Get the Best Deal: Whether you’re taking out a new mortgage or renewing an existing one, we’ll work to secure the best rate and terms for your needs.

Why Choose Garth Financial?

With a 5-year variable-rate mortgage, you can enjoy lower penalties, greater flexibility, and the opportunity to benefit from falling rates. However, it’s essential to consider your unique financial goals and market conditions.

Call Garth Financial today, or apply online, to learn more about variable-rate mortgages and find the right option for your home in Powell River. Let us do the work to secure the best mortgage for you!