Variable mortgage rates in Canada have gone through a roller-coaster ride in the years leading up to 2012. Canadian variable mortgage rates are tied to the prime lending rate and can be set at a discount or a premium to the prime lending rate. Historically variable rate mortgages (VRM’s) were simply offered at the prime lending rate, but over time lenders began competing with discounts off prime. They couldn’t do this of course unless their profit margins also increased.
Mortgage lenders profit margins increase on variable mortgage rates Canada when the prime lending rate is above 5%, when there is stability in the economy and when there is liquidity in the markets. These factors all disappeared and then reappeared to various degrees over the tumultuous 2007 recession and then sporadic recovery. Resulting discounts that had reached a low of prime minus 1% began to disappear and then reverse to a premium of as much as prime plus 1%. Then the roller coaster continued with discounting coming back to a low of prime minus 0.8% and then disappearing again to a point where mortgage lenders offered variable mortgage rates Canada at the prime lending rate plus or minus 0.10%.
This variable mortgage rate Canada roller coaster ride makes it very difficult to advise mortgagors on merits of either keeping their variable mortgage rate or converting it to a fixed mortgage rate. If a borrower is holding a Prime plus 1% VRM then they should definitely convert to a competitive 5 year fixed mortgage rate. On the other hand, if a borrower is at prime minus 1% then there are many advantages with staying variable. Then of course there’s everyone in between. The large gray area makes it impossible to have one size fits all advice for mortgagors in a variable mortgage rate in Canada. A VRM holder should look at their individual circumstances and seek the advice of an accredited mortgage professional before making a decision with their variable mortgage rate.