Variable mortgage rates regaining traction as Bank of Canada cuts rates

The rate cut prompted big commercial banks to lower their prime rates, which are used to set the rates charged for variable-rate mortgages.

Toma Sojonky, a mortgage broker at Verico Paragon Mortgage Group in West Vancouver, B.C., says variable-rate mortgages are beginning to regain some traction with clients after falling out of favour when the rate-hiking cycle began.

“I think there are folks who understand that the pendulum is swinging the other way,” he said. 

Those with a variable-rate mortgage have had a wild ride since the start of the pandemic.

What happened to variable rates during the pandemic?

When the Bank of Canada cut interest rates to nearly zero in the spring of 2020, those with variable-rate mortgages saw the rates charged on their loans fall too, helping fuel their popularity.

But the reverse was also true. When the central bank started rapidly raising rates in 2022 in an effort to bring inflation under control, those with variable-rate loans saw their costs march higher in lockstep. The increase in rates meant either higher payments or less principal being repaid on the loans. 

Borrowers who saw the interest rates charged on their loans more than double saw their monthly payments increase by hundreds of dollars or the amortization period of their loans extended by years.

The popularity of variable-rate loans plunged.

But the economy has shifted once more and the central bank has cut interest rates three times this year so far and suggested more cuts were coming.

Are more rate cuts likely?

In announcing the rate cut Wednesday, Bank of Canada governor Tiff Macklem said if inflation continues to ease broadly in line with the bank’s July forecast, it is reasonable to expect further cuts in the policy rate. 

Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, said clients with variable-rate loans were not happy when rates were rising, but the cycle is turning. 

“We’ve lived the worst of it, we’re on our way out,” she said. 

“So let’s look for the benefits and the benefit is, if they go variable and the rates go down, they’re going to live the benefit.”

Right now, the rates offered to those looking for a new variable-rate mortgage or needing to renew are higher than those being offered for five-year fixed rate mortgages, something that Leduc called an anomaly.

That’s because the expectations are that the Bank of Canada will continue to cut interest rates, lowering the amount charged to borrowers in the future. If something unexpected happens and the central bank doesn’t cut rates, then the rates charged on variable-rate mortgages won’t go down.

What to expect if you’re mortgage holder

But if things continue to roll out as expected, those choosing variable-rate loans will see the amount they are charged go down. Just how much and how quickly will depend on the central bank.

Sojonky says the discounts lenders offer to the prime rate for variable-rate mortgages are also improving. 

“Previously in the winter or last fall, we saw discounts to prime as low as 0.15 to 0.3, whereas now we are beginning to enjoy discounts to prime that are approaching one per cent again,” he said. 

Leduc says variable-rate mortgages also have the advantage of being less costly to break than their fixed-rate counterparts if you need to get out of one before the term is up.

The penalty for variable-rate loans is typically three months of interest, while a fixed rate closed mortgage penalty is typically the greater of three months of interest or what is called the interest rate differential amount, which is often much greater.

Leduc says none of her clients expect to break their mortgages before the end of their term but in reality, about half of them end up doing so.

Read more about mortgages:

• What is porting a mortgage in Canada—and when should you do it?
• Open bidding in Ontario: Game-changer or business as usual?
• How much income do I need to qualify for a mortgage in Canada?
• A parents’ guide to home down payment gifts and loans

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