Best 5-Year Variable Mortgage Rates in Canada

Best 5-Year Variable Mortgage Rates in Canada – Compare & Save

Introduction

A 5-year variable mortgage rate is one of the most popular mortgage products in Canada. Unlike fixed-rate mortgages, a variable-rate mortgage fluctuates based on the lender’s prime rate, which is tied to the Bank of Canada’s policy rate. This means your mortgage payments may increase or decrease throughout the term.

Many Canadian homebuyers choose variable mortgage rates to take advantage of potential savings if interest rates drop. However, they also come with some risks as rates can rise, increasing overall borrowing costs.

This guide provides insights into why 5-year variable mortgage rates are popular, factors that drive rate changes, and what to expect in 2025 for the Canadian housing market.

The Popularity of 5-Year Variable Mortgage Rates

The 5-year variable mortgage rate has remained a popular choice among Canadian homebuyers and investors due to its potential for lower borrowing costs compared to fixed-rate mortgages. Several factors contribute to its widespread appeal:

1. Lower Initial Interest Rates – Variable mortgage rates typically start lower than fixed rates, making them attractive for those looking to reduce initial mortgage payments.
2. Potential for Savings – If interest rates decline over time, borrowers with variable-rate mortgages benefit from lower payments without needing to refinance.
3. Short-Term Flexibility – Many homeowners who anticipate moving, refinancing, or paying off their mortgage early within five years choose variable rates to avoid higher long-term fixed rates.
4. Historical Performance – Over the last two decades, many borrowers who chose variable mortgages paid less interest overall than those who locked in a fixed rate.
5. Market Trends – During periods of economic uncertainty or when the Bank of Canada signals potential rate cuts, more borrowers opt for variable-rate mortgages in anticipation of savings.

Despite these advantages, variable-rate mortgages also come with risks, particularly during periods of interest rate hikes, making it essential to understand what drives changes in these rates.

What Drives Changes in 5-Year Variable Mortgage Rates?

The fluctuations in 5-year variable mortgage rates are primarily influenced by economic and market conditions. Here are the key drivers behind these changes:

1. Bank of Canada’s Overnight Rate

The most significant factor affecting variable mortgage rates is the Bank of Canada’s (BoC) overnight rate. Lenders set their prime rates based on the BoC’s rate decisions.

• When the BoC raises its rate, variable mortgage rates increase, leading to higher mortgage payments.
• When the BoC lowers its rate, borrowers benefit from lower mortgage payments.

2. Economic Conditions & Inflation

• High inflation forces the Bank of Canada to increase interest rates to slow down spending.
• When inflation is under control, the Bank of Canada may cut interest rates, leading to lower mortgage costs.
• Economic downturns or recessions often lead to lower mortgage rates as the government encourages borrowing.

3. Housing Market Trends

• If housing demand is strong, lenders may offer competitive mortgage rates to attract buyers.
• During market downturns or cooling periods, banks adjust their rates cautiously based on risk factors.

4. Lender-Specific Rate Adjustments

• Banks and mortgage lenders set their own prime rates, meaning variable mortgage rates can vary by lender.
• Some lenders offer discounts on variable rates during promotional periods.

5. Global Market & Bond Yields

• Although variable rates are not directly tied to bond yields, investor sentiment on global interest rate movements can influence rate-setting decisions in Canada.

Understanding these factors can help borrowers time their mortgage applications to secure the best possible variable rate.

Forecast for 2025 Housing Market

As we head into 2025, Canada’s housing market continues to be shaped by interest rates, supply shortages, and affordability concerns. Analysts predict three key trends for the mortgage and housing markets:

1. Gradual Rate Cuts Possible –
   The Bank of Canada may begin lowering interest rates in mid-2025 if inflation continues to stabilize. This would provide relief to variable-rate mortgage holders and make homeownership more affordable.

2. Home Prices Expected to Stabilize –
   After a period of price fluctuations in 2023 and 2024, home prices in key markets like Toronto and Vancouver are expected to stabilize or see moderate growth as demand remains high.

3. Increased Buyer Confidence –
   If mortgage rates decline, buyer confidence will return, leading to higher home sales volumes in 2025.

While the market is unpredictable, potential buyers should closely watch interest rate trends before making decisions.

February 2025: Mortgage Market Update

As of February 2025, the Canadian mortgage market is experiencing key shifts, with new developments impacting borrowers and interest rates:

• Interest Rate Cuts Expected: Economists anticipate the first BoC rate cut in months, with a potential 25 to 50 basis point reduction by mid-2025.
• Increased Mortgage Approvals: With lower rates on the horizon, more Canadians are securing mortgage approvals in anticipation of better lending conditions.
• Fixed vs. Variable Debate: Borrowers are now evaluating whether to choose fixed or variable mortgages, depending on their risk tolerance and future rate expectations.
• Housing Demand Rising: Demand for affordable housing and entry-level homes is increasing, pushing home prices slightly higher in some urban markets.

For borrowers considering a 5-year variable mortgage, now may be a good time to secure a competitive rate before further market changes.

Pros & Cons of a 5-Year Variable Mortgage

✅ Benefits of a 5-Year Variable Rate Mortgage

✔️ Lower Initial Interest Rates – Variable mortgage rates start lower than fixed rates, reducing initial monthly payments.
✔️ Potential for Cost Savings – If the Bank of Canada lowers rates, your payments decrease, saving you money.

✔️ More Flexibility – Variable mortgages often have lower penalties for breaking the mortgage early. This is beneficial for those who may consider refinancing before the end of their term.
✔️ Historically Lower Interest Costs – Over the past 20 years, variable-rate mortgage holders have paid less interest overall compared to fixed-rate borrowers.

❌ Risks of a 5-Year Variable Rate Mortgage

❌ Fluctuating Payments – Since your interest rate can change at any time, monthly mortgage payments may increase unexpectedly.
❌ Uncertainty in Long-Term Planning – If rates rise significantly, your total mortgage costs may end up being higher than a fixed-rate option.
❌ Impact on Budgeting – Payment fluctuations can make it harder to plan a long-term budget, especially for first-time homebuyers.
❌ Risk of Rising Interest Rates – If the Bank of Canada continues increasing rates, variable mortgage holders may pay significantly more over their term.

Despite these risks, many financial advisors and mortgage brokers still recommend variable rates for financially stable borrowers who can handle rate fluctuations and are looking for potential long-term savings.

Who Should Choose a 5-Year Variable Rate Mortgage?

A 5-year variable mortgage is ideal for the following types of borrowers:

• Risk-Tolerant Homebuyers – Those who can handle fluctuations in their mortgage payments without financial distress.
• Borrowers Expecting Interest Rate Cuts – If rates are expected to decline over the next few years, a variable mortgage allows you to take advantage of lower borrowing costs.
• Homeowners Planning to Sell or Refinance Early – Variable mortgages have lower penalties for breaking the mortgage compared to fixed-rate loans.
• Investors & Real Estate Buyers – Those looking to maximize cash flow on rental properties often opt for variable rates.

If you prefer payment stability and want to lock in a rate for peace of mind, a fixed-rate mortgage may be a better choice.

How to Secure the Best 5-Year Variable Rate

1. Improve Your Credit Score

• A high credit score (700+) helps secure the best mortgage rates.
• Pay bills on time, reduce debts, and avoid multiple new credit applications before applying for a mortgage.

2. Save for a Larger Down Payment

• A higher down payment (20% or more) reduces the lender’s risk, improving your chances of getting a lower rate.
• It can also help avoid mortgage default insurance (CMHC insurance), which adds to borrowing costs.

3. Compare Multiple Lenders

• Different banks, credit unions, and online lenders offer different mortgage rates.
• A mortgage broker can help you negotiate better rates and find exclusive deals.

4. Time Your Mortgage Application

• Keep an eye on the Bank of Canada’s interest rate decisions.
• If a rate cut is expected, waiting could mean securing a lower variable mortgage rate.

5. Understand Prepayment Privileges & Penalties

• Some lenders allow extra payments on your mortgage without penalties.
• Others charge high penalties for breaking the mortgage early – make sure to review the terms carefully.

Best Lenders for 5-Year Variable Mortgage Rates in Canada

Here are some of the top lenders offering competitive 5-year variable mortgage rates:

🏦 RBC (Royal Bank of Canada) – Competitive rates with strong customer service and multiple prepayment options.
🏦 TD Bank – Offers flexible prepayment privileges, making it easier to pay down your mortgage faster.
🏦 Scotiabank – Provides discounted variable rates for first-time homebuyers.
🏦 CIBC – Good for high-net-worth borrowers looking for flexible financing.
🏦 BMO (Bank of Montreal) – Strong mortgage products with cashback incentives for new borrowers.

💡 Tip: Check with a mortgage broker to see if you qualify for exclusive rates not advertised to the public.