A variable-rate mortgage has an interest rate that floats with prime rate. It is therefore referred to as a “floating-rate mortgage.”
The three years refers to the term of the mortgage contract. If you break before three years, you pay a penalty (typically three months of interest).
There are two types of floating rates:
(A) A standard variable rate mortgage (VRM): This has a payment that is fixed for the full term. As prime rate rises and falls, so does the percentage of principal you pay down with each payment.
(B) An adjustable-rate mortgage (ARM): This has a payment that moves up and down with prime rate.
Lenders are split roughly 50/50 as to which kind of floating rate they offer. Most big banks offer the standard variable-rate mortgage. Smaller mortgage finance companies typically offer adjustable-rate mortgages. Very few of either offer 3-year variables, however.
Most variable rates are closed, meaning you cannot get out of the mortgage contract early unless you pay a prepayment charge (a.k.a. “penalty”). As noted above, this charge is typically equal to three months’ interest, but not always.
Most mortgage borrowers choose either a 5-year fixed or 5-year variable rate. A 3-year variable is actually one of the least popular terms. We estimate less than 1 in 30 borrowers choosing one.
Why? Well, the 3-year variable has a few things going for it, but also some drawbacks. Below we take a look at both.
All mortgage terms have pluses and minuses. Here’s a rundown of each for the 3-year variable:
The best 3-year variable rate is the one that minimizes your borrowing costs. It could be a rate that’s slightly higher than a comparable 5-year variable. That might be a better choice if you’re looking for a shorter flexible term that minimizes your risk of paying prepayment penalties.
Remember, the goal is always to secure the lowest overall borrowing cost, not necessarily the lowest interest rate.
Here are other factors to consider when pondering a 3-year variable-rate mortgage:
Three-year variable rates have closely mirrored 5-year variable-rate movements over the past 10 years….up until 2020.
That’s when the two key variable rate products diverged, with 5-year rates hitting a low of around 1.00%, while 3-year variables remained priced at around 2.50%.
Three-year variables reached a peak of nearly 4% in late 2018, but have generally been available for between 2-3% since 2010.
In April 2021, intelliMortgage Inc. set a record for the lowest effective advertised rate in Canadian history: 0.95%. The term was a 3-year ARM.
Here’s more on Canada’s second-favourite variable mortgage type:
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.