Topic alert!
This blog is based on the current forecast of mortgage rates, which doesn't include the potential for tariff disruption (yet to be determined). Trump's tariff threats may alter the path of mortgage rates in 2025.
Should you choose a variable rate in 2025?
The prime rate is (finally) shifting downward. Is now the right time to choose a variable rate over a fixed rate?
Let's weigh the mortgage savings vs. risk to help you decide.
Is your variable choice about FOMO — or JOMO?
Already down by 1.75% since June 2024, variable rates (tied to bank prime rates and Bank of Canada policy rate movements) are still higher than fixed, but for how much longer?
The thing is, many still have the jitters from enduring the fastest variable rate rise in over 23 years. So, naturally, home buyers and owners are weighing their rate choice this year:
- FOMO — Fear of missing out on the budget savings from a variable rate that could eventually go lower than a fixed-rate lock now.
- JOMO — Joy of missing out on any risk that a variable rate poses while you happily lock into a great fixed rate and sleep soundly until you (ideally) renew into lowered market rates.
Let's explore the variable rate's potential for added mortgage savings it could bring over your next term.
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.
Variable rate FOMO?
Assuming a $500K mortgage at 25-year amortization:
How much could you save choosing our current variable rate of 4.35% (P- 1.10%) vs. locking into our current best 5-year fixed rate of 4.24%?
- Let's suppose variable rates go down to 3.70% (your term discount stays at P- 1.10%) after the first year of your 5-year term
- Compared to the fixed rate, your variable choice could save over $6,600 during your 5-year term (including more paid towards the principal)
In this simplified example, your mortgage payment with a variable rate would be higher in the first year (for example, $2,725 vs. $2,695 for the fixed), but would reverse to be $2,549 vs. $2,695 for the next 4 years assuming prime rates 'finish' their projected fall.
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.
Variable rates have gained ground.
According to True North Mortgage, as prime rate cuts piled up, the popularity of a 5-year variable rate pulled ahead of the (mortgage stalwart) 5-year fixed rate for the first time in months.
In November 2024, here's how True North clients chose:
- 5-year variable rate — 34%
- 5-year fixed rate — 21%
- 3-year fixed rate — 23%
During 'normal' economic times, about 30% of clients usually choose a variable rate, about 60% choose a 5-year fixed rate, and roughly 7% choose a 3-year fixed rate.
What will be the popular mortgage choice into early 2025? Stay tuned!
Note: Mortgage stats include all lenders True North's clients were placed with, including in-house CMHC-approved lender, THINK Financial.
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.
Need a lower 'open' variable rate?
If variable rates are your thing, and you have decisions to make in the next while (like a possible move) or extra money you'd like to put down on your mortgage principal — open (vs closed) variable rates can offer all the flexibility you need.
However, open variable rates tend to be higher than typical rates because of the increased possibility of mortgage changes that the lender has to absorb.
We currently offer a No Committment™ mortgage with the lowest open variable rate in Canada. Read more here, and apply online or talk to us if you want to know more.
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.
Give us a shout RN, and we'll BRB with your best rate.
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