Variable Mortgage Rates Rebound After Bank of Canada Cut

The Bank of Canada’s decision this week to lower its key interest rate provided welcome relief for borrowers with variable-rate mortgages. The cut led major commercial banks to reduce their prime rates, which in turn lowers the interest charged on many variable-rate mortgage products. For homeowners who endured rising costs during the rate-hiking cycle, the move restored some of the appeal of variable-rate loans.

Toma Sojonky, a mortgage broker at Verico Paragon Mortgage Group in West Vancouver, B.C., says variable-rate mortgages are starting to regain interest among clients after losing favour when interest rates climbed rapidly. “I think there are folks who understand that the pendulum is swinging the other way,” he said.

What happened to variable rates during the pandemic?

When the Bank of Canada pushed interest rates down to near zero in the spring of 2020, borrowers with variable-rate mortgages benefited directly: their mortgage rates fell alongside the central bank’s policy rate and prime rate, reducing monthly payments and making variable-rate products more attractive. That alignment between policy rate and consumer borrowing costs helped fuel demand for variable-rate options.

However, the reverse effect followed as the central bank began raising rates to address inflation. Starting in 2022, rapid rate hikes pushed the prime rate and variable mortgage costs upward, often quickly and sharply. Many borrowers experienced substantially higher monthly payments or saw their amortization schedules extend because less of each payment was applied to principal. As a result, consumer appetite for variable-rate mortgages declined.

More recently, the economy and the central bank’s stance have shifted, and the Bank of Canada has cut interest rates several times this year so far, signaling the possibility of further reductions. That change in outlook influenced lenders’ prime-rate decisions and reopened conversations about the merits of variable-rate mortgages for some borrowers.

Are more rate cuts likely?

In announcing the latest rate cut, Bank of Canada governor Tiff Macklem indicated that if inflation continues to ease broadly in line with the bank’s forecast, further reductions in the policy rate would be reasonable. Mortgage brokers say that guidance has already altered borrower sentiment.

Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, notes that clients who were frustrated by rising variable rates are starting to see the situation improve. “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.”

Still, some current variable-rate offers remain higher than comparable five-year fixed-rate products, which brokers describe as an anomaly driven by market expectations. If the Bank of Canada continues to cut rates as signalled, variable borrowers stand to benefit as prime and the interest charged on their loans fall. If rate cuts pause or reverse unexpectedly, variable rates may not decline.

What to expect if you’re a mortgage holder

If the central bank follows through with additional rate cuts, those with variable-rate mortgages should see their carrying costs fall. The speed and magnitude of those reductions will depend on the timing and size of policy moves and how quickly lenders adjust their prime rates.

Another factor is the discount lenders apply to prime for variable-rate mortgage products. Brokers report that discounts have been improving after narrowing during the period of higher rates. Where discounts to prime were once only a few basis points, some lenders are again offering larger discounts that make the effective mortgage rate more attractive.

Variable-rate mortgages can also be less costly to break than many fixed-rate closed mortgages. Typical penalties for breaking a variable-rate mortgage are often limited to a set number of months’ interest. In contrast, penalties for breaking fixed-rate closed mortgages commonly involve either a multi-month interest calculation or an interest rate differential amount, which can be considerably larger.

Leduc points out that while clients rarely expect to break their mortgage before term end, in practice a significant share do so. This practical reality is one reason some borrowers prefer the relative flexibility of variable-rate products, despite the potential for rate volatility.

Further reading 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