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A 5-year variable-rate mortgage is the most popular variable mortgage type in Canada. Compared to 6-month and 3-year variable-rate mortgages, the 5-year variable-rate mortgage gives you enough time to settle in before considering renewal or refinancing the mortgage.
This guide explains how a 5-year variable-rate mortgage differs from other variable- and fixed-rate mortgage terms.
Let’s start by understanding what this mortgage term is all about.
5-year variable-rate mortgages are loan products offered for a 5-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 portion of the payment to pay down the mortgage loan.
In a falling-rate environment, more of your payment will go towards paying down the mortgage loan. In a rising rate environment, a significant portion of your mortgage payment will go towards the interest expense.
The 5-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 5-year term compared to a three-year or six-month term.
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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 specified margin.
Let’s say a lender is quoting its 5-year variable-rate mortgage at Prime – 1.0%, and its current prime rate is 2.45%.
Your mortgage rate will be 1.45%, the lender’s prime rate of 2.45%, minus the margin rate of 1%.
If, after a year from today, the lender’s prime rate increases to 2.89%, your mortgage rate will be 1.89%. The new increased prime rate of 2.89%, minus the margin rate of 1.0%.
On the other hand, if the lender’s prime rate decreases to 2.2%, your mortgage rate will be 1.2%, the new lower prime rate of 2.2% minus the original rate margin of 1%.
In all the above scenarios, your rate margin does not change – only the prime rate changes.
At the end of the 5-years term, you can choose to either renew or refinance the mortgage.
Refinancing the mortgage entails replacing the mortgage with a new one. Refinancing a mortgage allows you to customize your mortgage more, such as switching the rate type from fixed to variable or switching the terms from five years to three years or six months.
Overall, the terms, rate, rate type, conditions, and lender for the new mortgage will probably differ from your existing mortgage.
There are many reasons why you may choose to refinance your mortgage after the end of the 5-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. Your loan balance and the remainder of your amortization will not change.
Federally regulated lenders, such as TD, Haventree Bank, Scotia Bank, and EQB, must provide you with a renewal letter at least two days before your current mortgage term ends.
The renewal statement will contain the following information:
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A 5-year variable-rate mortgage will be right for you if you:
A 5-year variable-rate mortgage is better if:
Overall, a variable rate will save you thousands of dollars in interest costs over the life of your mortgage term.
A 5-year fixed-rate mortgage will be right for you if:
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