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Variable Mortgage Rates are Low, and Here's How They Work in Your Favour

Before the COVID-19 outbreak, many Canadian homeowners chose a fixed rate for their mortgage loan. The advantages to a fixed rate are you know how much you will pay every month because the interest rate does not change. The downside to a fixed rate mortgage is that you don’t get to capitalize on rate cuts like you would with a variable mortgage.

During the pandemic, the Bank of Canada reduced its overnight rate from 1.75 to just 0.251. Variable mortgage rates are based on the Bank of Canada’s overnight rate. This means that homebuyers can get a desirable interest rate on their variable rate mortgage loan. Paying less interest on your loan means more money in your pocket.

As of June 17, we can see 5-year variable mortgage rates from banks and other mortgage loan lenders that are as low as 1.75% from less-known lenders2.

Using CIBC’s online Mortgage Payment Calculator3, we can compare the rates: 1.75% variable rate from a less-known lender, 2.45% variable rate from CIBC, and a 2.82% fixed rate from CIBC.

For the example, lets use the following criteria:

  • Purchase price: $500,000
  • Down payment: $100,000 (20%)
  • Amortization: 30 years
  • Payment frequency: Monthly
  • Creditor Insurance: No

Keeping all the information the same while just changing the interest rate and loan type (fixed vs. variable), we see a variation in monthly payments:

  • 5-year variable rate at 1.75% results in a monthly payment of $1,428
  • 5-year variable rate at 2.45% results in a monthly payment of $1,568
  • 5-year fixed rate at 2.82% results in a monthly payment of $1,644

Now $140-$216 more a month doesn’t seem like a big difference when you compare the 2.82% fixed rate to the 2.45% or 1.75% variable rates. However, when you compare the difference in interest you’ll pay over the first 5 years of your loan, that’s where you will see the real difference:

  • 5-year variable rate at 1.75% results in $32,633 in interest paid
  • 5-year variable rate at 2.45% results in $45,927 in interest paid
  • 5-year fixed rate at 2.82% results in $55,999 in interest paid

Wow! That’s a big difference. We can see that a 1.07% difference in loan rate results in a savings of $23,366 in interest over the first 5 years.

What this example illustrates is that any percent off your interest loan rate helps you keep more of your hard-earned money. Of course, with a variable rate, you are not guaranteed to always have your rate so low, so you may need some flexibility in your budget.

If you need to buy a home right now, there are many things working in your favour: low variable loan rates, 30-year amortization periods are back, buyers can delay mortgage payments up to 6 months at most major banks, and the Bank of Canada’s 5-year qualifying rate has recently dropped from 5.19% to 5.04% (making it easier to qualify for a loan). These changes won’t last forever, so you may want to take advantage of them while you can!

 

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Sources:
Bank of Canada lowers overnight rate target to ¼ percent (Bank of Canada)
2 Best 5 Year Variable Mortgage Rates (Rate Spy)
3 Mortgage Payment Calculator (CIBC)