As of mid-2025, the Bank of Canada’s overnight rate has dropped to 2.75%, pulling the prime rate down to around 4.95%. Economists expect it may fall further by year-end. Despite these policy rate cuts, fixed mortgage rates remain elevated, driven by ongoing volatility in 5-year Government of Canada bond yields. Many fixed mortgage offers are hovering near or even above 6%. This mismatch is driving more borrowers to take a closer look at variable-rate mortgage options.

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The Renewal Wave of 2025 Is Reshaping Borrower Choices

Roughly 1.5 million Canadian mortgages are set to renew in 2025 many originally secured during the ultra-low interest rate window of 2020 to 2022. With fixed rates now substantially higher than those early pandemic deals, homeowners are exploring alternatives to keep monthly payments manageable. Variable rates, once considered too risky for many, are gaining traction.

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Why Variable Rates Are Attracting Renewing Borrowers

1. Lower Starting Costs with More Room to Fall

Variable rates are directly tied to the prime rate. As the Bank of Canada continues to cut rates, variable-rate borrowers can benefit from lower payments in real time. As of early 2025, variable and fixed rates are nearly on par making the potential for future rate drops a compelling incentive.

Forecasts suggest variable rates could undercut fixed rates by as much as 0.50% to 0.75% later this year.

2. Smaller Penalties for Breaking Early

Variable-rate mortgages generally come with lower prepayment penalties, usually three months’ interest. In contrast, fixed-rate mortgages often include larger, less predictable penalties based on interest rate differential (IRD) calculations. For those considering refinancing or selling in the next few years, this flexibility is a key advantage.

3. Potential Long-Term Savings

Historically, variable-rate mortgages have outperformed fixed-rate options over full interest rate cycles, particularly when rates are falling. A 1.5% rate drop on a $500,000 mortgage could translate into approximately $7,500 in annual savings before tax.

4. Cash Flow Advantages and Flexibility

For borrowers focused on managing monthly cash flow, especially first-time buyers or those coming off a low-rate renewal, variable-rate options can offer short-term relief and longer-term upside. These loans are often easier to convert into fixed-rate terms when market conditions shift.

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The Data: Variable Rates on the Rise

Recent data and surveys reflect a clear shift in consumer preference:

• The variable-rate share of new mortgages rose from about 4.2% in 2023 to 12.9% in early 2024, and will continue to grow in 2025.
  
• According to a Royal LePage survey, 29% of homeowners plan to choose variable rates at renewal up from 24% the year before.
  
• Some brokers report that up to 40% of new mortgages are now variable-rate, compared to just 7% a year earlier.
  

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Is a Variable Rate Right for You?

Like any financial decision, choosing a variable-rate mortgage depends on your personal goals, financial situation, and risk comfort level.

Advantages	Considerations
Lower initial interest rates	Rates could increase if economic conditions shift
Lower penalties for breaking early	Requires active market monitoring
Easier conversion to fixed	Monthly payments may fluctuate over time
Better cash flow in short term	Not ideal for long-term budget certainty

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Who Might Benefit Most from a Variable-Rate Mortgage?

• Borrowers expecting to sell or refinance within 2–5 years
  
• Homeowners comfortable with rate fluctuations in the short term
  
• Renewing borrowers coming off low pandemic-era rates looking to soften the payment increase
  
• Buyers seeking payment flexibility and lower penalties in uncertain economic conditions
  

On the other hand, fixed-rate or hybrid options may be more suitable for those seeking long-term stability and predictability.

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Looking Ahead

With more interest rate cuts expected, variable-rate mortgages offer a flexible alternative for those willing to follow market trends and take advantage of future savings. But variable doesn’t mean “one-size-fits-all.” The right choice should be guided by your financial plans, risk profile, and how long you intend to keep the mortgage.

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Need Help Deciding?

Whether you’re renewing or buying, it’s important to understand how current rates align with your financial goals. Cannect can help you compare fixed, variable, and hybrid mortgage options and build a custom strategy based on your unique situation.

Explore your mortgage roadmap with confidence. Talk to Cannect today.