Does a Variable Rate Mortgage Make Sense Today?

Should A Borrower Prefer Variable or Fixed Rate Mortgages?

A model house is sitting on a wooden table next to stacks of coins.

As we embark on a new year, 2024, there is optimism in the markets that interest rates will decline. Inflation peaked over a year ago and many market participants are now predicting material rate reductions by the Bank of Canada this year.

A variable-rate mortgage might make sense for some clients who want to benefit from anticipated rate declines. However, the math is not clearly in favor of variable rates, and we caution homeowners to temper their expectations about when rates will decline and by how much.

Are Expectations for Lower Interest Rates Realistic?

Nobody has a crystal ball for future interest rates. Look no further than all the incorrect predictions about inflation and interest rates over the past three years. Almost everyone got it wrong. Despite this, consumers of information are reading the 2024 predictions from the same analysts that got it wrong in recent years and taking them to heart. Perhaps, a sober second look at the situation will help.

There is a general consensus that rates will decline in 2024 but we do not believe that the path to lower rates will be a straight line. Just look at the inflation data published on Jan 16. Inflation increased in December to 3.4% from 3.1% in November. The underlying core inflation numbers were all higher than expected. As a result, bond yields rose by close to 0.30% within a few days and expectations of an April Bank of Canada rate cut have all but dissipated.

The big five banks think that the Bank of Canada will cut rates by between 1.0% and 1.5% in 2024, with the cuts mostly occurring in the latter half of the year. Many optimists predict that rate cuts will be even larger than this over the next two years. The view that a recession will cause significant rate cuts may be realistic, but we need to put today’s rates in context.

Canada’s Prime Rate History

A graph showing the canadian prime rate over time

The main things to learn from history are:

If the central bank does not get inflation under control, rates can move much higher as we saw happen in the early 1980’s and 1990’s. Central bankers are determined to avoid a recurrence of this scenario, emphasizing their commitment to raising rates to contain persistent inflation. Let’s hope the spikes in the above graph do not happen again;
The current prime rate is at the historic average going back many decades but if you look at just the past 30 years, the average prime rate is 4.53%.

Will Mortgage Rates Drop Materially?

Considering the average over the past 30 years, if inflation returns to normal (i.e. 2.0%), wouldn’t it be reasonable to assume that the prime rate would return to a level close to this average? That would mean a decline of over 2.5% from today’s prime rate of 7.20%. This does not mean such a decline happens quickly. Inflation pressures persist. However, at some point in the future, a reversion back to historical averages should occur.

We doubt that rates will decline to the exceptionally low interest rates of 2021, when the prime rate bottomed out at 2.45%. This period of rate history is an anomaly that central banks are likely to avoid repeating.

Pay attention to the inflation numbers for guidance. If they continue to decline, interest rates will decline and a return to a more historically normalized rate environment may materialize.

The current expectation for lower rates has improved market sentiment. We suspect that this sentiment shift is more important to the overall market than the absolute amount of the rate decline. An enemy of a healthy market is uncertainty. The latter half of 2023 was marked with uncertainty as participants couldn’t be sure if rates would continue to go up, level off or decline. It now appears that the peak in rates has arrived, and the direction of rates is down. This relative level of certainty creates market conditions conducive to new business activity

How to Choose Between Fixed and Variable Mortgage Rates?

The choice of a fixed rate vs variable rate mortgage is a personal one. It primarily depends on your budget and your risk tolerance. Are you willing to take the chance that variable rates will rise, costing you money in the form of higher monthly mortgage payments or extended amortizations? Are you, on the other hand, willing to lock in a fixed rate mortgage today, knowing that if rates fall, you will not benefit during the term of the mortgage?

Variable-rate mortgages may be right for some borrowers, but not all. Most Canadian mortgage borrowers tend to prefer stability and minimal risk. Fixed rates provide this, allowing a borrower to lock in rates for several years and not have to worry about where rates are going.

Variable-rate mortgage borrowers expose themselves to interest rate risk. If rates decline, they will benefit. If rates increase, these borrowers will pay more. If you have the stomach for it and can afford to be wrong on your rate prediction, then variable rates might be right for you.

Now that the market expects rates to begin declining, it might make sense to consider a variable-rate mortgage. Unfortunately, this decision is challenged by the inverted yield curve. Let’s look at rates today (Jan 25, 2024):

Variable mortgage rates are usually lower than five-year fixed mortgage rates. This is because the usual shape of the yield curve is positive, meaning longer term rates are higher than shorter term rates. Variable rate mortgages are priced off short-term interest rates.

An inverted yield curve happens when short-term interest rates are higher than longer term rates. We have now been in an inverted yield curve environment for over a year. Inverted curves are not the norm, but they do happen, and they tend to last for a period of a few months to up to close to two years. The current inversion has now lasted for 18 months, the longest since 1980.

To decide to take a five-year variable rate mortgage today means you are accepting to pay over 1% more in interest than the fixed rate equivalent until rates decline.

If rates do not decline, or if they do not decline as much as many analysts predict, you could be paying significantly more for your mortgage with a variable rate. If we assume that the Bank of Canada cuts rates by 1% in 2024, the variable rate at the end of the year will be 5.05%, still higher than the five-year fixed rate today of 4.94%. For you to break even on the mortgage you would need variable rates to decline more than an additional 0.50% in early 2025 and remain there for the life of the mortgage. That is to just break even. Only if variable mortgage rates decline more than 1.5% would you benefit.

Of course, variable-rate mortgages have lower prepayment penalties so borrowers looking for that kind of flexibility can still benefit from a variable-rate mortgage. From a purely cost of borrowing perspective, however, rates must decline significantly for a variable-rate mortgage to make sense.

Will Mortgage Rates Decline in 2024?

We present for your consideration the positive and negative views on this question.

Yes, Mortgage Rates Will Decline in 2024

Inflation peaked at 8.1% in June 2022. In December 2023 it was at 3.4%. This is a material decline. The trend is clearly positive. The Bank of Canada says that if the declining trend continues consistently then they will be able to cut rates. Most analysts predict that this will happen, allowing the Bank to cut rates as early as June 2024. These cuts are expected to be between 1.0% and 1.5% by the end of 2024. This would provide material rate relief for existing variable-rate mortgage holders and improve the math for new variable-rate borrowers.

No, Mortgage Rates Will Not Decline in 2024

Core inflation pressures persist. The recent inflation data in Canada for December was not positive. Many of the macro-level issues that influence inflation are not resolved. Things like the decline in the trend toward globalization, wars, restrictions on shipping routes, upward pressure on oil & gas prices, uncertainty around the US election cycle and mounting government debt are all inflationary. They are also hard to predict. In addition, the US economy continues to produce relatively positive economic numbers. Continuing upward pressure on inflation should temper any hopes of material rate reductions.

Accurately predicting future interest rates is nearly impossible. Keep an eye on the market for guidance but try to focus on affordability when considering financing a home. If your buying decision depends on lower future rates you are exposing yourself to risk that may work against you.

Does a Variable-Rate Mortgage Make Sense Today?

A variable rate can be attractive because you benefit from declining rates and in the long run, variable rates tend to be lower than fixed rates. That view is less appealing today given the inverted yield curve, but this inversion cannot last forever.

Trying to predict the future is difficult. We submit that it is also not wise to position your home for gain or loss on your best guess for the future direction of interest rates. Your mortgage broker or sales advisor at a bank are paid for providing mortgage expertise to help with your borrowing decisions, not for macro-economic forecasting. The argument that variable rates are better than fixed rates because rates will certainly decline assumes that the person giving this advice has a crystal ball for predicting future interest rates.

Instead of trying to predict where rates are going, focus on what you can afford. Consider short-term fixed rates if you believe that rates will be lower in two or three years. You can benefit from lower rates without exposing yourself to variable-rate risk. Most borrowers today continue to prefer fixed rates. If you want a variable rate today, make sure you understand how much rates need to drop for you to benefit and also be aware of what can happen if rates unexpectedly increase.

How to Choose the Best Mortgage Rate

The best thing to do is shop around. Simply finding out what your bank will do for you will not get you the best mortgage rate. No single lender has the best rates every day. You need to see a variety of lender alternatives to find the best mortgage rates.

Traditional mortgage brokers can show you rate options but usually limit what you see. Online rate shopping sites show you a variety of mortgage rates but do not manage the mortgage process for you.

There is a new kind of online mortgage broker, called Frank Mortgage, which shows you a wide variety of the best rates. We can show you the best mortgage rates in Ontario, the best mortgage rates in BC, the best mortgage rates in Alberta and elsewhere across Canada. We also operate as an unbiased mortgage broker that can handle the mortgage process for you.

Not only do we handle the process for you, but we personalize your mortgage journey. We provide you with the information you need to make a proper assessment of fixed or variable mortgage rates so that you can make an informed decision about your mortgage.

If you are looking for today’s mortgage rates you can find them here:

SHOP ALL RATES

< Previous

Next >

About The Author

Don Scott

Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.

Connect with Don on LinkedIn!

A scale with bags of money and a house on it.

How to Access Your Home Equity

By Don Scott • March 11, 2025

For Canadian homeowners, the equity built up in their homes is often one of their most valuable financial assets. Whether it’s to fund renovations, consolidate debt, make new investments, or even enjoy a dream vacation, accessing this equity can open doors to new opportunities. With housing markets evolving and interest rates fluctuating, understanding your options for tapping into home equity is more important than ever. Let’s explore the main ways Canadian mortgage borrowers can access their home equity, breaking down each option with its benefits and considerations.

Impact of Tariffs on Housing and Mortgages

By Don Scott • February 27, 2025

Recent news about the United States threatening to impose tariffs on Canadian goods has introduced significant uncertainty into Canada's economic landscape. These developments are poised to impact various sectors, notably the housing and mortgage markets. While the potential ramifications of these tariffs are not easy to predict, we attempt here to identify the issues we should all be considering. The Tariff Threat In early Feb, U.S. President Donald Trump announced significant tariffs on Canadian imports. He talks frequently about unfair trade and has also stated his objective was to address concerns over illegal immigration and drug trafficking into the United States. On February 1, 2025, he signed executive orders imposing a 25% tariff on all Canadian goods, excluding energy products, which were subjected to a 10% tariff. These tariffs were initially set to take effect on February 4, 2025. The US President Trump postponed the imposition of these tariffs for one month, until March 4, 2025. This postponement was intended to provide time for Canada to address U.S. concerns regarding border security and drug trafficking. On Feb 27, the US President confirmed that the tariffs on Canada and Mexico would be put in place as of March 4. This is not good news and hopefully Canadian diplomats can resolve this. Immediate Economic Implications Despite the delay to March 4, and some moves by Canada to address the issues, tensions have escalated. On February 10, 2025, President Trump announced additional tariffs - a 25% duty on all steel and aluminum imports, including those from Canada, set to commence on March 12, 2025. In response, Canada has threatened retaliatory tariffs on U.S. goods, making the prospect of an unexpected trade war between historically good neighbours a real possibility. The US has also said reciprocal tariffs will take effect in April. The situation remains fluid, with ongoing negotiations between the U.S. and Canada aiming to resolve trade disputes and address the underlying issues prompting the tariffs. These measures are expected to disrupt trade flows, elevate production costs, and potentially lead to a slowdown in economic growth. Bank of Canada Governor Tiff Macklem has cautioned that such trade conflicts could curb economic growth, hurt the Canadian dollar, and potentially lead to higher inflation. Impact on the Housing Market The imposition of tariffs on all goods and a retaliatory response from Canada would have several negative consequences for Canadian housing markets. Increased Construction Costs: Tariffs on imported materials, such as lumber and steel, would increase construction costs. Any increase in construction costs would be passed through to consumers, resulting in higher prices for both new homes and renovations. These elevated costs could exacerbate housing affordability issues and constrain the supply of new homes. Market Uncertainty: The prevailing economic ambiguity may deter potential buyers, leading to a deceleration in housing demand. Prospective homeowners might adopt a cautious stance, postponing purchases until the economic and interest rate outlook stabilizes. Job Losses: Higher costs could slow activity in housing development and renovation that could lead to job losses. This could place some current mortgage borrowers and homeowners under stress and take other potential new market entrants out of the market. Tariff Impact on Mortgages The impact that significant tariffs have on the mortgage market could be immediate: 1. Mortgage Rates There are diverging opinions currently about where mortgage rates may go if tariffs are imposed. There are two key channels through which we will see the interest rate impact. Bank of Canada Monetary Policy Adjustments - Most economists agree that a tariff war with the US will slow down the Canadian economy, perhaps sending us into a recession. The Bank of Canada may contemplate reducing interest rates to stimulate economic activity. Governor Macklem has indicated that monetary policy could support demand in the event of a trade war, suggesting that rate cuts might be more substantial than previously projected. However, many have cautioned that interest rate cuts may not have a meaningful impact on an economic slowdown resulting from higher costs due to tariffs. While the Bank of Canada may not be able to effectively offset the negative impact, many analysts, including those at the Bank of Montreal, think they might cut rates by as much at 1.50% this year if the US imposes the full 25%, across-the-board tariffs. This would significantly reduce variable mortgage rates, which would be beneficial for mortgage borrowers. Bond Yield Fluctuations - Escalating trade tensions have already led to a decline in Canadian bond yields, with the 5-year bond yield reaching its lowest point since June 2022. Bond yields often decline in advance of economic weakness. A downturn in bond yields is often followed by a decline in fixed mortgage rates, potentially offering relief to borrowers. 2. Reduced Market Activity The tariff talk creates tremendous uncertainty. The old saying is ‘uncertainty breeds contempt’ and we are seeing that in the reactions many are having to the tariff threat as well as in declining consumer confidence in survey results. We may witness a slowdown in housing and mortgage market activity with new buyers, movers, and investors exercising caution until the tariff issue is resolved. 3. Mortgage Defaults Economic weakness usually leads to worsening performance in mortgage portfolios. Job losses, loss of confidence and narrowing options will lead to an increase in mortgage defaults as borrowers struggle to meet obligations. We have already recently seen an uptick in consumer credit defaults and mortgage delinquencies have been increasing. Despite this concern, Canadian mortgage portfolios have performed well during prior downturns. The legal structure and culture in Canada promote good payment behavior and Canadians always do whatever it takes to keep their home.

A man is giving keys to a woman in a living room.

Owner-Occupied Rental Property

By Don Scott • February 11, 2025

Purchasing an owner-occupied rental property in Canada can be a strategic way to build wealth while securing a home for yourself. But if you’re planning to put down less than 20% of the property’s purchase price, you’ll likely need mortgage default insurance. Here’s what you need to know about how mortgage default insurance works for owner-occupied rental properties.

Learn More

What’s Next?

Join our email community

Join Our Email Community

Mortgage Brokerage Licensed in Ontario (FSRA #13204), British Columbia, Alberta, Manitoba, Newfoundland & Labrador, and New Brunswick (#230015752).