A variable mortgage is based on the Prime Rate, which means that the interest rate can fluctuate throughout your mortgage term, depending on how the Prime Rate changes. A 5 year variable mortgage is Canada’s most popular variable rate mortgage, and the rate can change throughout the 5 year term of the mortgage. A 5 year variable mortgage generally has better mortgage rates compared to other variable mortgage terms.

A variable rate mortgage is constantly changing, meaning the interest rate you receive at the beginning of your term could be very different at the end of your term. With a variable rate mortgage, payments can change depending on the bank’s policy (Whether the payment is static or not). Changing variable rates won’t affect your monthly mortgage payments, but will determine the percentage each monthly payment will go towards the principal and interest. With a variable rate mortgage, your interest rate changes and so will the amount of interest you pay.

With every mortgage payment, you contribute to the mortgage principal and interest. If you have a mortgage rate that increases, that means a higher percentage of your payment will go towards your interest rather than the principal amount, and will mean that you are paying off your mortgage balance at a slower rate. You might be required to increase your mortgage payments in the next term as you’ll be behind your mortgage payment schedule.

If you have a mortgage rate that decreases, this means you will be paying less interest and more of your payment will go towards your mortgage principal. This will result in you paying off your mortgage faster.

Whether you have an open or closed mortgage, will determine your ability to make pre-payments to your mortgage without penalties. With an open mortgage, you have the freedom to make unlimited amount payments to your mortgage principal whenever you want each year. Keep in mind that open mortgages typically have higher mortgage interest rates compared to a closed mortgage.

With a closed mortgage, you are allowed to make annual prepayments but have a limit. Most Canadian mortgage lenders will allow you to pay 10% to 20% in prepayments every year without penalties, however if you pay more than that, you will have to pay prepayment penalties.

In 1973 and 1979, there were two oil crises that made the Bank of Canada raise the Prime Rate, which made the 5 year variable mortgage rate soar to an all time high in 1981 with an interest rate of 19.81%.

In 2009, the Bank of Canada decreased the Prime Rate to stimulate the economy due to the 2008 recession, resulting in the 5 year variable rate decreasing to 1.95%.

The variable rate is now at 2.15% in 2022 and is expected to increase in the next few years.

Some might want to lock in a rate to get some security, especially if you think an interest rate hike is coming. Although a variable rate is constantly changing, you have the option to lock in your rate at any time depending on your lender. This means you will be guaranteed a rate for the remainder of your 5 year term, even if the Prime Rate changes. However, you might need to pay a fee to lock in the rate. Typically the penalty for breaking a variable rate mortgage and going into a fixed rate is 3 month’s of interest.

The Bank of Canada’s main purpose is to balance economic growth and inflation. They regulate credit and currency in the best interest of the economic life of the nation. When we have lower interest rates, consumers and businesses are able to borrow more money resulting in people buying homes, shopping more and businesses investing in growth and providing more jobs. With prolonged periods of low interest rates, inflation will happen resulting in increased home prices, cost of products going up and increased demand for oil and gasoline. In order to reduce inflation, the Bank of Canada will increase interest rates so that the cost of borrowing will be more expensive, and this includes variable mortgage rates.