Bank of Canada Rate Cuts Leading to Increase in Variable Mortgage Rates

The recent decision by the Bank of Canada to reduce its key interest rate target has brought positive news for borrowers with variable-rate mortgages, reviving interest in these once popular loans.

This rate cut has led major commercial banks to lower their prime rates, which determine the rates for variable-rate mortgages.

Toma Sojonky, a mortgage broker at Verico Paragon Mortgage Group in West Vancouver, B.C., notes that variable-rate mortgages are gaining traction once again among clients after losing favor during the previous rate-hiking cycle.

According to Sojonky, “I think there are individuals who recognize that the trend is changing direction.”

Those with variable-rate mortgages have experienced significant fluctuations since the onset of the pandemic. When the Bank of Canada slashed interest rates to nearly zero in spring 2020, rates on variable-rate mortgages also fell, contributing to their popularity.

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Conversely, when the central bank began aggressively raising rates in 2022 to combat inflation, holders of variable-rate mortgages experienced significant cost increases. This led to higher monthly payments or a longer repayment period for the loans.

Borrowers who saw their interest rates more than double witnessed a substantial rise in their monthly payments or extended loan terms.

As a result, the popularity of variable-rate loans declined.

However, with the recent shifts in the economy and the central bank implementing three rate cuts so far this year, there is optimism for further cuts in the future.

Bank of Canada governor Tiff Macklem mentioned that additional rate cuts may be expected if inflation continues to decrease according to their forecasts.

Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, emphasized that clients with variable-rate mortgages faced challenges during rate hikes but the tide is turning.

Leduc stated, “We’ve gone through the worst, and things are looking up.”

Currently, the rates offered for new variable-rate mortgages or renewals are higher than those for five-year fixed-rate mortgages, a situation Leduc described as unusual.

There is an expectation that the Bank of Canada will persist in lowering interest rates, benefiting borrowers in the future. However, if the central bank decides not to cut rates unexpectedly, the rates on variable-rate mortgages will not decrease.

Ultimately, borrowers opting for variable-rate loans could see reduced charges, depending on the central bank’s decisions.

Sojonky noted that the discounts provided by lenders on prime rates for variable-rate mortgages are improving.

He mentioned, “Previously, discounts to prime were as low as 0.15 to 0.3, but now we are seeing discounts approaching one percent once again.”

Leduc highlighted another advantage of variable-rate mortgages, stating that they are less costly to terminate compared to fixed-rate mortgages if needed before the term ends.

The penalty for breaking a variable-rate loan is typically three months’ worth of interest, whereas a penalty for breaking a fixed-rate closed mortgage involves the greater amount between three months of interest or the interest rate differential, which can be significantly higher.

Leduc acknowledged that while none of her clients plan to break their mortgages prematurely, about half end up doing so eventually.