Variable mortgage rates are becoming more appealing than fixed rates, offering potential savings, according to new research from BMO Economics. 

With expectations of more rate cuts from the Bank of Canada this year, BMO believes that variable-rate mortgages could help borrowers save more over time. Senior economist Sal Guatieri suggests that because borrowing costs are likely to fall rather than rise—especially in the case of a trade war—choosing a floating rate mortgage could be beneficial.

Though current variable mortgage rates are about the same as, or slightly higher than, 5-year fixed rates, Guatieri believes this won’t last.

Where rates are headed: BMO predicts the Bank of Canada’s policy rate could drop to 2.50% by the end of the year, or even to 1.50% if a full trade war with the U.S. occurs. This could push the prime rate below 4.50%, meaning borrowers with variable rates could see significant savings.

Other big banks share a similar outlook, with CIBC, National Bank, and TD expecting the BoC rate to drop to 2.25% by year-end, while RBC predicts it could go as low as 2.00%.

More borrowers are opting for variable rates: As variable rates become more attractive, more borrowers are rethinking their mortgage options. 

Data from the Bank of Canada shows that nearly 25% of new mortgages were variable-rate as of November, up from less than 10% earlier in the year. Mortgage broker Ron Butler also notes this trend is accelerating, with the share of variable mortgages he originates increasing from 7% last year to 40% now.

BMO suggests that by opting for variable rates now, borrowers are setting themselves up for lower payments as rate cuts take effect in the near future.

“We estimate a borrower putting 10% down on a half-million-dollar home financed over 25 years would save an average of 40 bps per year compared with locking in for five years,” he wrote. “That equates to just over $100 per month or more than $6,000 in five years.”

While BMO’s forecast is in line with market expectations for a 50 basis point rate cut this year, Guatieri notes that there’s no guarantee the Bank of Canada will lower rates further.

“If the Bank keeps rates steady, locking in could still provide some benefit,” he wrote. “Additionally, if the economy improves and a trade war is avoided, inflation could rise, prompting the Bank to reverse some rate cuts. In that case, a fixed rate would be the better option.”

For borrowers who are risk-averse, a shorter-term fixed rate might offer a good compromise.

Three-year fixed rates are currently slightly lower than five-year rates, and they provide the flexibility to refinance sooner at a potentially lower variable rate. According to BMO, this strategy could save borrowers around 20 basis points per year over five years compared to committing to a five-year fixed rate now.

Most importantly, choose your new term based on your current situation, and feel free to contact us if you'd like to explore other options.