The 3-year Variable Mortgage
The 3-year variable is an alternative to the standard 5-year variable.
People choose 3-year variables for four primary reasons:
- When this term has lower rates than 5-year variables.
- Because they want more flexibility to refinance earlier with no penalty.
- When they don’t plan to own the home for more than three years.
- Because they want a mortgage with a cheaper penalty if they break the contract early.
Variable-rate mortgages have a few disadvantages, however:
- Your interest costs can soar if rates rocket higher.
- Variable rates are harder to get approved for if you have above-average debt ratios. That’s because most lenders require variable-rate borrowers to prove they can afford payments at the posted 5-year fixed rate—in case rates soar. All borrowers who have less than 20% equity must qualify based on the much higher “benchmark 5-year rate,” as set by the Bank of Canada.
- Variable rates have historically cost borrowers less interest than long-term fixed rates (but rates have also been in a downtrend for over 30 years).
Here are a few more tidbits about this particular term:
- We estimate that less than 1 in 20 borrowers choose a 3-year variable.
- Most lenders pay your legal and appraisal fees when you switch into a 3-year mortgage. (Note: You cannot typically “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).
- Variable-rate mortgages can have two types of payments, depending on the lender:
- Floating payments: This is where your payments increase and decrease based on a benchmark of some sort (most commonly prime rate).
- 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.
If you want to guesstimate where 3-year variable rate discounts (to prime rate) are headed short term, keep an eye on Canada’s 3-month T-Bill yield (below).
Source: Bank of Canada
And here is prime rate itself, upon which most variable mortgages are based…