Find the Best 3-Year Variable Mortgage Rates in Canada

Pros

• Better rates than a 5-year variable: This often isn’t the case, but depending on lenders’ current rate offers, the 3-year variable can sometimes offer borrowers interest cost savings vs. a 5-year term. At the time we’re writing this, the lowest rate in Canadian history was a 3-year adjustable-rate mortgage at 0.95%.
• More flexibility: For those who want greater flexibility to refinance their mortgage earlier without penalty, a 3-year variable can fit the bill.
• Plan to move/sell in less than 5 years: For homebuyers who don’t plan to own their home for more than three years, this term can be a perfect solution as it avoids the potential of having to break a longer-term mortgage early.

Cons

• Risk of rising rates: This applies to variable rates in general, which carry a risk of rising interest costs if the Bank of Canada raises its key interest rate. When that happens, it causes prime rate—and thus variable rates—to rise.
• Potentially harder to qualify for: Variable rates can be more difficult to get approved for if you have above-average debt ratios. Despite variable rates being available for as low as sub-1.00% as of June 2021, most lenders require variable-rate borrowers to prove they can afford payments at the posted 5-year fixed rate—in the event that rates soar. This means borrowers generally have to qualify based on the much higher “benchmark 5-year rate,” as set by the Bank of Canada (5.25% as of summer 2021).
• Shorter contractual spread hold: This means that the discount from prime rate isn’t held as long as, say, a 5-year variable. That could matter if variable-rate discounts shrink market-wide (which sometimes happens during economic stresses). That could mean you have to renew at an inferior variable rate in three years, whereas a 5-year variable would let you enjoy your big discount longer.

Other 3-year variable facts

Here’s more on Canada’s second-favourite variable mortgage type:

• It’s estimated that less than 1 in 30 borrowers choose a 3-year variable in any given year.
• Most lenders pay your legal and appraisal fees when you switch into a 3-year mortgage. (Note: You generally can’t “switch” a collateral-charge mortgage or a mortgage linked to a line of credit. These types of mortgages must be refinanced when changing lenders, which usually entails legal fees)
• Floating-rate mortgages can have two types of payments, depending on the lender:
  • Fixed payments: This is where the lender keeps your payment the same for the entire term. If prime rate goes up, you pay more interest and less principal, and vice versa. In most cases, your payment must at least cover the interest due—or the lender will raise the payment.
  • Floating payments: This is where your payments increase and decrease based on a benchmark of some sort (most commonly prime rate). Most 3-year variables have this payment type.