Find the best 5-year variable mortgage rate

January 29, 2025 Bank of Canada announcement update

On January 29, 2025, the Bank of Canada (BoC) reduced its target for the Overnight Lending Rate by 0.25%, bringing it down to 3.00%. This marks the sixth consecutive rate cut since June 2024, with a total reduction of 2% from the previous high of 5%. 

• The rate cut was widely expected following December’s inflation report, which showed the headline number came in at 1.8%. The BoC’s outlook is based on a scenario with no U.S. import tariffs, a forecasted GDP growth of 1.8% in 2025, and inflation holding near its 2% target.
• Borrowers with variable-rate mortgages and home equity lines of credit (HELOCs) will see relief as the prime rate at most lenders is set to drop to 5.2%. For an average-priced home, this reduction translates to approximately $87 in monthly savings.
• Fixed mortgage rates, though not directly tied to the Bank’s rate, may experience minor reductions as five-year bond yields have dropped to 2.87%, its lowest level since December 10.
• Personal loans, car loans, and lines of credit tied to the prime rate will also see lower interest costs, making borrowing more affordable for consumers. Savers, on the other hand, will face lower returns on high-interest savings accounts (HISAs) and Guaranteed Investment Certificates (GICs). 
• The BoC signaled that future rate cuts would slow down, with two more quarter-point reductions expected in 2025. However, if the proposed 25% U.S. import tariffs take effect, the central bank may need to revise its strategy to address inflationary risks.

January 2025: Mortgage market update

The housing market in Canada saw a rather quiet year in 2024, as buyers stayed on the sidelines in anticipation of lower rates. With the Bank of Canada having implemented its fifth policy rate cut in 2024 and further cuts broadly expected, home sales have finally started to pick up.  

Variable mortgage rates have fallen in proportion to the Bank of Canada’s 50-points December rate cut, and, with more rate cuts anticipated in 2025, further downward pressure on rates is on the horizon. Fixed rates are tied to bond yields, which have tumbled in the wake of the Bank of Canada’s rate cuts. As a result, fixed mortgage rates have decreased slightly as well. 

Overall, though, when looked at from a historical perspective, both fixed and variable mortgage rates are currently elevated. Anyone shopping for a mortgage rate in Canada today should be aware of the economic factors below.

• Real estate update: In the latest market data for December 2024, the Canadian Real Estate Association (CREA) reported a slowdown in home sales, ending the year on a quieter note. A total of 27,643 properties were sold, representing a 5.8% decline from November but a significant 19.2% increase compared to December 2023, highlighting the market's ongoing recovery. Home prices saw a timid rise, with the national average price increasing 2.5% year-over-year to $676,640, though it softened by 2.2% month-over-month. The MLS Home Price Index (HPI) showed slight month-over-month growth of 0.3% and a minor annual decline of 0.2%, suggesting prices are firming up. Inventory levels, while higher than a year ago, remain below the long-term average. By the end of December, a total of 128,000 properties were listed for sale, up 7.8% annually, but below the long-term average of 150,000. New listings fell 1.7% month-over-month to 29,128. Months of inventory increased slightly to 3.9, close to a seller’s market, while the sales-to-new-listings ratio (SNLR) stayed balanced at 56.9%. Looking ahead, CREA expects a surge in activity in spring 2025, as lower interest rates and new listings are likely to draw buyers back into the market.

Read more: Canadian real estate ends 2024 with chilly sales

• CPI update: The latest Consumer Price Index (CPI) report from Statistics Canada reveals the inflation rate dipped to 1.8% year-over-year in December, down slightly from 1.9% in November. A key reason for this decrease was the temporary GST/HST tax holiday introduced in mid-December, which affected about 10% of the CPI basket. This holiday mainly reduced prices for food purchased in restaurants (down 1.6%), alcoholic beverages (down 1.3%), and toys and games (down 7.2%). However, higher gas prices, which rose by 3.5% year-over-year, partially offset these savings. Mortgage interest costs also continued their downward trend, rising 11.7% year-over-year – their smallest increase since 2022 –, thanks to the Bank of Canada’s five recent rate cuts. Shelter inflation edged down slightly to 4.5% from 4.6% in November, and rent inflation eased to 7.1% from 7.7%. Despite this slowdown, rent prices have still increased by 22.1% since December 2021, reflecting continued pressure on renters. The latest inflation data adds to market expectations of another quarter-point rate cut at the Bank of Canada’s next announcement on January 29. Nonetheless, there is a significant risk that the United States may introduce new tariffs on Canadian exports in early February. If that happens and Canada responds with its own tariffs, price pressures could rise again, making it harder for the BoC to maintain its 2% inflation target. 

  Read more: December CPI drops to 1.8% due to tax holiday

Forecast for 2025 housing market

The Canadian Real Estate Association (CREA) has released its 2025 housing market outlook, highlighting a recovery driven by pent-up demand, easing borrowing costs, and an influx of spring listings. The forecast predicts 532,704 residential property sales in 2025, reflecting an 8.6% increase from 2024 and surpassing the previously estimated 6.6% growth. This positive trend is expected to continue in 2026, with transactions set to rise another 4.5% to 556,662. The national average home price is projected to grow 4.7% year-over-year to $722,221 in 2025, with a further 3.3% increase to $746,379 in 2026. Regional dynamics might also vary, with British Columbia and Ontario anticipated to see significant sales growth due to lower current sales levels and abundant supply. Meanwhile, Alberta and Saskatchewan are expected to experience demand primarily reflected in rising prices. 

What the November Fed rate cut means for Canadians

On November 7, 2024, the US Federal Reserve announced a quarter-point cut to its benchmark interest rate, marking its second consecutive reduction following a half-point cut in September. This decision aims to manage inflation, which has decreased from a peak of 9.1% in June 2022 to 2.4% in September.

The Fed’s future path for rate cuts has become less predictable, particularly in light of the recent US Federal Election. President Elect Donald Trump's economic proposals could potentially reignite inflation. He has also raised concerns about the Fed's independence in monetary policy decisions. 

The latest rate cut is compounded by rising bond yields in the US, notably following Trump's victory.  This trend extends to Canada, where the government of Canada's five-year bond yield recently rose above 3%, suggesting that fixed mortgage rates will increase, leading to higher borrowing costs for Canadian homeowners and potential buyers.

As both Canadian and US economies navigate potential volatility, borrowers are advised to prepare for fluctuating interest rates in the coming months. 

Also read: US Federal Reserve cuts rate by 0.25% in November announcement

Canadian mortgage reform update

On September 16, 2024, the federal government announced sweeping changes to mortgage qualification rules for first-time home buyers, as well as those purchasing newly-constructed homes.

As of December 15, 2024:

• 30-year amortizations will be available for all first-time home buyers, regardless of whether they have an insured mortgage. These extended amortizations are also available for any purchase of new construction.
  
  
• The maximum purchase price for an insured mortgage (where less than 20% down is paid) will be increased to $1.5 million, from the current $1 million.
  

These are some of the most impactful mortgage reforms announced since 2012, and are anticipated to increase first-time home buyers’ affordability and access to the housing market. 

Learn more about these new mortgage rule changes on the Ratehub.ca blog

5-year variable mortgage rates: Quick facts

• Variable mortgage rates fluctuate with the prime lending rate.
• Variable rates are typically stated as "prime plus or minus a percentage".
• Some 5.36% of all mortgage requests made to Ratehub.ca from January - December 2023 were for 5-year variable-rate mortgages.
• 5-year fixed mortgage rates are driven by 5-year government bond yields.
• 23% of consumers opted for a variable-rate mortgage in 2024, down from 27% in 2023. (Source: 2024 CMHC Mortgage Consumer Survey)

Historical 5-year variable mortgage rates

Checking historical mortgage rates is a great way to properly understand which mortgage terms attract lower rates and whether rates are especially high or low at any given moment. Here are the lowest 5-year variable rates of the year in Canada for the last several years, compared to several other types of mortgage rates.

Source: Ratehub Historical Rate Chart

The popularity of 5-year variable mortgage rates

Although fixed-rate mortgages are more popular, according to Mortgage Professionals Canada, 25% of Canadian mortgage-holders had variable-rate mortgages at the end of 2022, making it the second most popular type of mortgage.

Historically, fixed rates are generally more popular, however, in the wake of the COVID-19 pandemic, the Bank of Canada cut its target overnight lending rate in March 2020, which caused the prime rate to go down. As a result, variable-rate mortgages experienced a surge in popularity; as mentioned above, roughly 25% of all mortgages in Canada at the end of 2022 were variable-rate mortgages, in contrast to 20% in 2019. However, as variable-rate mortgages have climbed to rates significantly higher than fixed-rate mortgages in the wake of multiple Bank of Canada rate hikes over the course of 2022, their popularity has waned considerably in 2023. While some 26% of all rate inquiries to Ratehub.ca in 2022 were for 5-year variable rates, they accounted for just 5.36% of all rate requests to Ratehub in 2023. Moreover, according to the 2024 CMHC Mortgage Consumer Survey, 23% of consumers opted for a variable-rate mortgage in 2024 (down from 27% in 2023). The table below, sourced from the same survey, shows the popularity of fixed-rate mortgages in 2024 among the four main categories of people who contracted mortgages.

A 5-year mortgage term is the most popular duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average. It also tends to be heavily promoted by major lenders. A further breakdown of mortgage terms shows that about 80% of mortgages have terms of five years or less.

What drives changes in 5-year variable mortgage rates?

As previously mentioned, the 5-year variable mortgage rate will fluctuate with any movements in the prime lending rate, which is the rate at which banks lend to their best and most credit-worthy customers. The variable mortgage rate is typically stated as prime plus/minus a percentage discount/premium.

Canada’s prime rate is influenced primarily by economic conditions. The Bank of Canada adjusts it depending on the state of the economy, determined by various factors in employment, manufacturing, and exports. Together, these shape the inflation rate. When inflation is high, the Bank of Canada must act to avert an over-stimulated economy. They will increase the prime rate to make the act of borrowing money more expensive.

Conversely, in cases where inflation is low, the Bank of Canada will decrease the prime rate to stimulate the economy and improve the attractiveness of borrowing. The discount/premium on the prime rate applied to the variable mortgage rate is set by the banks, based on their rate strategy and desired market share. 

The bottom line: Should you get a 5-year variable rate?

As long as you're comfortable with risk and understand that variable rates can fluctuate throughout your term, then a 5-year variable rate is a reasonable choice. Since variable rates do have the inherent risk of rate increases, make sure you have enough money in your budget to cover a higher mortgage payment if rates increase.

If you're still not sure about what mortgage product is right for you, it's a good idea to speak to a mortgage broker. Consultations are free, and you'll leave with expert advice, personalized to you.

For more information, check out these helpful pages! 

• Best Mortgage Rates in Canada
• 5-Year Fixed Mortgage Rates
• Variable or Fixed Mortgage Rates
• Amortization
• Mortgage Term vs. Amortization
• Is a 5-Year Fixed-Rate Mortgage Term Right For You?
• Porting and Assuming Your Mortgage