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If you are looking for a medium-term variable-rate mortgage, a 3-year variable-rate mortgage may be the right option. Compared to a six-month term, a 3-year option provides enough time to settle in and gauge the market before the mortgage is up for renewal.
This guide explains how a 3-year variable-rate mortgage differs from the other types of variable-rate mortgage terms and other fixed-rate mortgage terms. Let’s start by understanding what this mortgage term is all about.
3-year variable-rate mortgages are loan products offered for a 3-year term with rates that change with the lender’s prime lending rate changes.
While your regular mortgage payment may not change, your interest rate will change if the lender’s prime rate changes.
Changes in your interest will not necessarily affect your regular mortgage payment. It will impact the payment portion to pay down the mortgage loan.
In a falling-rate environment, more of your payment will go towards paying down the mortgage loan. While in a rising rate environment, a more significant portion of your mortgage payment will go towards the interest expense.
A 3-year term has more exposure to interest rate risk than the other variable-rate mortgage terms.
There is a high probability that the interest rate will change before the end of your three-year term compared to a six-month but low likelihood of rate change compared to a five-year variable rate mortgage term.
The rates on variable mortgages are tightly tied to the lender’s prime rate, directly linked to the Bank of Canada’s prime rate. Variable rates are quoted as Prime Rate (+/-) A Margin.
Let’s say a lender is quoting its 3-year variable-rate mortgage at a prime of 1.4%, and its current prime rate is 2.45%.
Your mortgage rate will be 1.05%, the lender’s prime rate of 2.45%, minus the margin rate of 1.4%.
If the lender’s prime rate increases to 2.95% a year from today, your mortgage rate will be 1.55%, the new increased prime rate of 2.95%, minus the margin rate of 1.4%.
On the other hand, if the lender’s prime rate decreases to 2.15%, your mortgage rate will be 0.75%, based on the new lower prime rate of 2.15% minus the original rate margin of 1.4%.
In all the above scenarios, your rate margin does not change – only the prime rate changes.
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All mortgage loans in Canada are offered for a specified period. In the case of a 3-year variable-rate mortgage, your mortgage contract will expire in three years. At the end of the mortgage contract, you can pay off the loan in full, take ownership of the property, renew the mortgage, or refinance the mortgage.
Refinancing a mortgage entails replacing it with a new one. This allows you to customize your mortgage more, such as switching the rate type from fixed to variable or changing the terms from three years to five years or even six months.
Overall, the terms, interest rate, rate type, conditions, and lender of the new mortgage will probably differ from those of your existing mortgage.
There are many reasons why you may choose to refinance your mortgage after the end of the 3-year term:
Renewing your mortgage extends your contract to a new term with your default mortgage insurer without changing your loan amount or amortization period. You can renew your mortgage to stay with your current lender or move to a new lender through a switch.
You will likely get a new rate when you renew or switch your mortgage.
Federally regulated lenders, such as TD, Haventree Bank, Scotia Bank, and EQB, are required to provide you with a renewal letter at least two days before the end of your current mortgage term.
The renewal statement will contain the following information:
A 3-year variable-rate mortgage will be right for you if you:
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A 3-year variable-rate mortgage is better if:
A 3-year fixed-rate mortgage will be right for you if:
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