Should you choose a variable rate in 2025?

Here's a reminder of variable-rate benefits.

Despite suffering the equivalent of 19 rate hikes (0.25% increments) between March 2022 and June 2024, the narrative has suddenly shifted back to the benefits this rate type offers during a period of declining rates:

• Instant budget relief with each variable rate drop by the Bank of Canada — if you choose an adjusting-payment variable mortgage (ARM).
  
• Your amortization reduced with each rate drop, helping you pay off your mortgage faster — if you have a fixed-payment variable mortgage with a big bank (VRM).
• Historically, a variable rate tends to save homeowners more over the life of a mortgage.
• With a variable-rate product, you have more options, like
  • The flexibility to lock into a fixed rate at any time, penalty-free.
  • Paying a lot less penalty than a fixed-rate mortgage if you decide to switch lenders.

How fast (or far) might variable rates fall?

Bank prime rates have already dropped 1.75% from the peak of 7.20%.

True North Mortgage CEO Dan Eisner predicts prime rates might fall by a total of 2.50% by the end of 2025 — for a resting prime rate of 4.70%.

(Lenders typically offer discounts off prime to offer lower variable rates for their best clients.)

That's another 3 rate drops (0.25% increments) at least.

If we hit a recession, variable rates could come down faster. The amount variable rates could fall during your term would (obviously) affect how much you'd save vs. choosing a fixed rate right now.

You should know that variable rates are normally lower than fixed rates.

We've been living in the (rate) upside-down for the last couple of years.

Homeowners are looking at the current variable rate, and it's still higher than our best 5-year fixed rate. Typically, variable rates are lower than 5-year fixed rates by a spread of anywhere from 0.25 to 1.0% (during the pandemic, the spread increased to around 1.5%).

At some point, now that higher rates have cooled the economy, the natural (rate) order of things will reassert and variable rates will eventually return to being lower than a 5-year fixed rate.

Should you resist variable-rate FOMO and choose fixed?

Despite the allure of declining prime rates — a variable rate isn't for everyone.

Set it, and forget it. Some homebuyers and owners, especially first-timers, prefer the set-budget strategy (aka peace of mind) of a fixed rate.

Consider your risk preference. Prime rates (directly affected by Bank of Canada rate decisions) carry the risk of rising again if inflation trends up, which may lead to 'rate regret' if you usually prefer the relative safety of a fixed rate.

Fixed rates are currently lower. These rates have come down ahead of 'expected' prime rate declines, making it more desirable to lock into a fixed rate if you're comfortable with the mortgage payment. True North has great rate term rates available, thanks to our volume discount and access to several lenders.

A low short-term fixed rate may help bridge the uncertainty gap.

With rate drops already underway, there's still worry that market volatility could interrupt the cycle to affect variable mortgage rates in the wrong direction for a time. Or, they don't want to lock into a 5-year rate when rates could be lower before then.

Some clients choose to go with a shorter-term fixed rate, such as a 3-year deal, which may see them into lower rates sooner than a 5-year fixed might.

Or, our low, low 6-month Rate Relief™ product can also offer a quick budget break (and extra time for market rates to drop further) for a switch or to help with closing costs or moving expenses.

YOLO. So get your best rate, with us.

You only live once (unless you have nine lives like a cat or Rick Astley), so you may as well save the most on your mortgage.

We make it easy. Our expert brokers offer you exceptional 5-star service, along with your guaranteed best rate and the right mortgage product for your needs, regardless if your details are straightforward or more complex.

We can help with your rate decisions in 2025 and beyond — anywhere you are in Canada.

We're here online, on the phone, via email, or drop by a store for friendly, in-person mortgage help.