What happens at the end of a 5-year variable mortgage?

At the end of a 5-year variable mortgage term, your loan will be up for renewal. If you still owe a principal balance, your lender will likely reach out to discuss renewing your mortgage for another term. You will have the option of deciding between another variable-rate or fixed-rate mortgage. Renewing shouldn’t cost you anything unless you decide to refinance your mortgage and borrow additional funds.

Can you break a 5-year variable mortgage?

Yes, you can break a 5-year variable mortgage in the middle of the term. If you have a closed mortgage, however, a penalty will be applied. Open variable-rate mortgages allow you to break the mortgage without a penalty, but the interest rates are typically higher. Most variable-rate mortgages charge a three-month interest penalty if you break the contract. A simple way to estimate this penalty is to multiply your current mortgage balance by your current interest rate, then divide by four.

Should I switch my variable-rate mortgage to a fixed-rate mortgage if the prime rate increases?

Most mortgage lenders allow borrowers to switch from a variable to a fixed-rate mortgage in the middle of the term, without a penalty. However, there are typically some conditions you must follow. Let’s use a 5-year variable-rate closed mortgage as an example. Depending on the financial institution, you will likely have to choose a fixed mortgage term that’s at least as long or longer than the term remaining on your variable mortgage. For example, if you are two years into a five-year term, you would have to choose a fixed-rate term of three years or longer. Also, you will be subject to the best possible fixed rate at the time that you switch. Depending on market conditions, it may or may not be advantageous to do so.

Will mortgage rates go down in 2024 in Canada?

Much like the stock market, it’s impossible to guarantee what will happen to mortgage rates in the future. That said, the market consensus seems to be that a slowing economy and a return to more normal inflation levels will enable the Bank of Canada to begin decreasing interest rates in 2024. In fact, we saw the first rate cut of 25 basis points in June. Many leading economists, including David Rosenberg of Rosenberg Research & Associates, Inc., and Douglas Porter, Chief Economist of BMO, expect the BoC to continue lowering interest rates, gradually leading to lower mortgage rates.

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Compare The Best 5-year Variable Mortgage Rates

By Colin Graves

Last updated September 09, 2024

Compare the best 5-year variable mortgage rates

Partners on this page provide us earnings.

According to CMHC's 2024 Mortgage Consumer Survey¹, 69% of Canadian mortgage consumers have chosen a fixed-rate mortgage this year, while only 23% opted for a variable rate — down from 27% in 2023.

With the Bank of Canada’s recent interest rate cut, however, and indications that inflation is under control, some Canadians are starting to wonder if now is the time to choose variable over fixed.

If you are considering a variable-rate mortgage, you can compare the current best 5-year variable rates in Canada below.

The best current 5-year variable mortgage rates in Canada

What is a 5-year variable mortgage rate?

A 5-year variable mortgage rate fluctuates with the prime lending rate over a five-year term.

This differs from a fixed mortgage rate, which is set at a specific rate for the entire term and does not fluctuate.

The Bank of Canada sets the prime lending rate. Banks and credit unions use this rate to determine the variable interest rates for mortgages, loans and lines of credit.

Just because you have a variable mortgage rate doesn’t mean your monthly mortgage payments will increase or decrease as interest rates change. Some lenders keep your payments the same but change how much goes toward interest and principal, while others change your payment amount based on the interest rate.

How do I know if a 5-year variable rate mortgage is right for me?

Generally, a 5-year variable rate mortgage is best suited for borrowers with budget flexibility who are willing to accept the risk of increasing interest rates in exchange for potentially lower rates during the mortgage term.

If you tend to be risk-averse or you struggle to afford a sudden jump in your monthly mortgage payment, a fixed-rate mortgage will be more predictable.

Another reason to consider a variable-rate mortgage is the flexibility it offers. Most lenders, with some conditions, allow you to switch your variable-rate mortgage to a fixed rate during the term.

And if you need to break your variable rate mortgage, you may only be subject to a three-month interest penalty. This is often less costly than an Interest Rate Differential (IRD) charge, a fee lenders may charge, more commonly associated with fixed-rate mortgages, based on the difference between your original interest rate and the current rate for the remaining term.

What affects 5-year variable mortgage rates in Canada?

Variable mortgage rates are tied to mortgage lenders’ prime rates and are usually adjusted when the Bank of Canada changes its overnight lending rate. This overnight rate is primarily used to control inflation, as we’ve seen first-hand in recent years.

Inflation and interest rates remained low in Canada for many years, but the COVID-19 pandemic caused a surge in prices and inflation. To control inflation, the Bank of Canada introduced a series of interest rate hikes, followed by a rate cut. These rate hikes resulted in significant increases in mortgage interest rates for Canadians with variable-rate mortgages.

The popularity of 5-year variable mortgage rates in Canada

In the early days of the pandemic, before the spike in inflation and subsequent rate hikes, variable mortgage rates were at historic lows, becoming a popular pick amongst homebuyers. This was due to the Bank of Canada cutting the overnight rate by 1.5% within a single month in March 2023.

This prompted many Canadians battling high housing prices to choose variable-rate mortgages over fixed rates, which hadn’t dropped to the same levels. Since then, many variable-rate mortgage holders are struggling to keep up with increased mortgage costs, especially in expensive housing markets such as Toronto and Vancouver. But we anticipate that more homebuyers will be looking into 5-year variable rates as more BoC cuts take place.

Pros and cons of getting a 5-year variable-rate mortgage

A variable-rate mortgage can be the best choice for specific borrowers in the right market conditions, but they’re certainly not for everyone. Here are the pros and cons you need to consider before locking in a 5-year variable rate.

Pros

Historically, variable rates have been lower than fixed in Canada
If rates drop, you’ll pay less interest on your mortgage
You may pay a lower penalty (than on a fixed-rate mortgage) if you break the mortgage early
It might be the better choice if you anticipate interest rates to drop in the future

Cons

If rates rise, you’ll suddenly have to pay a higher interest on your mortgage, affecting your personal budget and amortization
Most variable-rate mortgages are not portable (they can’t be transferred to another property if you move)
The possibility of higher interest rates may give your financial anxiety

Historical 5-year variable rate trends in Canada

For most of the past 10 years, variable-rate mortgage holders enjoyed lower interest rates than those with fixed-rate mortgages. These lower rates were due to the Bank of Canada maintaining a policy of low interest rates for several years, which translated to low variable mortgage rates. Mortgage lenders also tend to price variable rates lower than fixed because the borrower assumes more of the interest rate risk.

In 2020, the COVID-19 pandemic caused a sudden shift in interest-rate policy. At first, the Bank of Canada lowered rates even further to stimulate an economy that had ground to a near halt. This caused variable mortgage rates to fall to historic lows. Fixed rates also dropped but remained higher than variable rates.

By 2022, inflation had grown significantly due to several factors, including increased COVID-related government spending and global supply-chain issues exacerbated by Russia’s invasion of Ukraine. As a result, variable mortgage rates began to rise steadily as the Bank of Canada increased interest rates to control inflation.

Variable mortgage rates peaked in July 2023 and remained unchanged until the Bank of Canada announced a 0.25% cut in June 2024.

Today, while both fixed and variable rates remain high, the 5-year variable mortgage rate is slightly higher than the 5-year fixed. This may change again as interest rates decrease, but only time will tell.

5-year variable rate mortgage FAQs

What happens at the end of a 5-year variable mortgage?

+

At the end of a 5-year variable mortgage term, your loan will be up for renewal. If you still owe a principal balance, your lender will likely reach out to discuss renewing your mortgage for another term.

You will have the option of deciding between another variable-rate or fixed-rate mortgage. Renewing shouldn’t cost you anything unless you decide to refinance your mortgage and borrow additional funds.
Can you break a 5-year variable mortgage?

+

Yes, you can break a 5-year variable mortgage in the middle of the term. If you have a closed mortgage, however, a penalty will be applied. Open variable-rate mortgages allow you to break the mortgage without a penalty, but the interest rates are typically higher.

Most variable-rate mortgages charge a three-month interest penalty if you break the contract. A simple way to estimate this penalty is to multiply your current mortgage balance by your current interest rate, then divide by four.
Should I switch my variable-rate mortgage to a fixed-rate mortgage if the prime rate increases?

+

Most mortgage lenders allow borrowers to switch from a variable to a fixed-rate mortgage in the middle of the term, without a penalty. However, there are typically some conditions you must follow.

Let’s use a 5-year variable-rate closed mortgage as an example. Depending on the financial institution, you will likely have to choose a fixed mortgage term that’s at least as long or longer than the term remaining on your variable mortgage. For example, if you are two years into a five-year term, you would have to choose a fixed-rate term of three years or longer.

Also, you will be subject to the best possible fixed rate at the time that you switch. Depending on market conditions, it may or may not be advantageous to do so.
Will mortgage rates go down in 2024 in Canada?

+

Much like the stock market, it’s impossible to guarantee what will happen to mortgage rates in the future. That said, the market consensus seems to be that a slowing economy and a return to more normal inflation levels will enable the Bank of Canada to begin decreasing interest rates in 2024. In fact, we saw the first rate cut of 25 basis points in June.

Many leading economists, including David Rosenberg of Rosenberg Research & Associates, Inc., and Douglas Porter, Chief Economist of BMO, expect the BoC to continue lowering interest rates, gradually leading to lower mortgage rates.

Last updated September 09, 2024

Colin Graves Freelance Writer

Colin Graves is a Winnipeg-based financial writer and editor whose work has been featured in publications such as Time, MoneySense, MapleMoney, Retire Happy, The College Investor, and more. Before becoming a full-time writer, Colin was a bank manager for over 15 years.

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