Variable Rates Are Back—And They Brought Snacks!

In the world of mortgage financing, borrowers are always faced with the decision between fixed-rate and variable-rate mortgages. Recent trends show a resurgence in variable-rate mortgages, thanks to central bank policies and market dynamics. Meanwhile, fixed-rate mortgages, especially the 30-year fixed-rate option, are seeing slight dip in interest rates. Understanding this is important for would-be homeowners and those looking to refinance.

Variable-Rate Mortgages: Newfound Interest

Variable-rate mortgages (VRMs) have interest rates that change based on the market conditions, often tied to a benchmark rate like the Bank of Canada’s overnight rate. Historically, VRMs have been attractive during times of falling interest rates because borrowers can get lower payments without re-negotiating their loan terms.

As of early 2025, the Bank of Canada has cut rates multiple times and has brought the policy rate down to 3.00%. This has resulted in 5-year variable mortgage rates to be almost on par with fixed rates, a scenario we haven’t seen since November of last year. Analysts expect further rate cuts and potentially bring the policy rate to 2% by the end of this cycle. This makes VRMs more attractive for borrowers who want to take advantage of interest savings.

Ron Butler of Butler Mortgages says the bond market is so volatile right now, it’s like the 2008 Global Financial Crisis. He notes the Canadian 5-year bond yield has dropped from a high of 3.85% in April to 2.64% recently. This has narrowed the gap between variable and fixed mortgage rates.

Data from the Bank of Canada shows more and more borrowers are opting for VRMs. As of November, 25% of new mortgages were variable-rate, up from less than 10% earlier in the year. Butler’s firm is seeing the same trend, with 7% of their mortgages being variable-rate last year and 40% now.

One advantage of VRMs is the lower penalty for early mortgage termination. Unlike fixed-rate mortgages which can have interest rate differential (IRD) penalties that can be huge, VRMs only require a 3-month interest penalty. This gives borrowers more flexibility to adjust their mortgage terms before the end of the term.

Fixed-Rate Mortgages: Recent Trends

Fixed-rate mortgages (FRMs), especially the 30-year fixed-rate mortgage, provide borrowers with the predictability of steady payments over the life of the loan. This is great for long-term planning since monthly payments are not affected by interest rate changes.

According to Freddie Mac’s Primary Mortgage Market Survey, the average rate for a 30-year FRM was 6.87% as of February 13, 2025, down from 6.89% the previous week. This is the lowest for the 30-year FRM so far in 2025. A year ago, the rate was 6.77%. The 15-year FRM averaged 6.09%, up from 6.05% the prior week and down from 6.12% a year earlier.

Sam Khater, Freddie Mac’s Chief Economist, says the recent stability in mortgage rates is benefiting buyers, with purchase demand stronger than a year ago. This could mean more buyer activity soon.

Takeaways for Borrowers

Choosing between a fixed-rate and variable-rate mortgage involves looking at your financial situation, risk tolerance and expectations of future interest rate movements. VRMs can save you money in a declining interest rate environment but comes with the risk of higher payments if rates rise. FRMs give you payment stability which is great for budgeting especially for those with lower risk tolerance.

Also, consider the penalties associated with breaking a mortgage before its term ends. As mentioned earlier, VRMs have lower penalties compared to FRMs which can be a big factor for borrowers who plan to refinance or sell their property before the mortgage term ends.

External factors such as trade tensions can also impact interest rate trends. For example, the threat of a trade war with the US introduces uncertainty that can affect future rate decisions by central banks. Borrowers should stay informed about these developments as they can affect both variable and fixed mortgage rates.

Conclusion

The mortgage landscape in early 2025 offers borrowers great options in both variable and fixed-rate products. With rates converging due to central bank policies and market conditions, it’s time to re-evaluate your financial goals and risk tolerance. Talk to mortgage professionals to get personalized advice to help you make informed decisions in this dynamic environment.