The prime rate is finally trending downward. But is now the ideal time to choose a variable rate over a fixed one? Let’s weigh the potential mortgage savings against the risks to help you make an informed decision.
Is Your Variable Rate Choice Driven by FOMO or JOMO?
Since June 2024, variable rates—which are tied to bank prime rates and Bank of Canada policy movements—have dropped by 1.75%. Although they are still higher than fixed rates, the question remains: for how much longer?
Understandably, many homebuyers and owners remain cautious after experiencing the steepest rate hikes in over two decades. Now, in 2025, the decision comes down to two key mindsets:
- FOMO (Fear of Missing Out): The worry about missing out on savings as variable rates potentially drop below today’s fixed-rate options.
- JOMO (Joy of Missing Out): The peace of mind from locking into a fixed rate and avoiding the risk of future variable rate increases.
To help you decide, let’s explore the potential savings and advantages that a variable rate can offer over your next mortgage term.
Benefits of Variable Rates in a Declining Market
While variable rates experienced a significant rise between March 2022 and June 2024, the current environment highlights their benefits during periods of falling rates:
- Immediate Budget Relief: With an adjusting-payment variable mortgage (ARM), your payments decrease whenever the Bank of Canada reduces rates.
- Faster Mortgage Payoff: If you have a fixed-payment variable mortgage with a major bank (VRM), each rate drop reduces your amortization period, helping you pay off your mortgage quicker.
- Historical Savings: Variable rates have traditionally saved homeowners more money over the life of their mortgage.
- Flexibility:
- You can lock into a fixed rate at any time without penalties.
- Penalties for breaking a variable-rate mortgage are typically much lower than those for a fixed-rate mortgage.
How Much Further Could Variable Rates Drop?
Bank prime rates have already decreased by 1.75% from their peak of 7.20%. Industry experts, including Harry Toor of Mortgage Wisdom Corporation, predict that prime rates may drop by a total of 2.50% by the end of 2025, settling around 4.70%. If a recession occurs, rates could decrease even more rapidly.
Historically, variable rates have been lower than fixed rates. However, over the past couple of years, this trend reversed. As rates normalize and the economy continues to cool, variable rates are expected to regain their position as the lower-cost option compared to fixed rates.
Should You Choose Fixed Instead of Variable?
Despite the appeal of declining prime rates, variable rates aren’t suitable for everyone. Here are factors to consider:
- Risk Tolerance: If the possibility of rate increases would cause financial stress, a fixed-rate mortgage offers the predictability and stability of consistent payments.
- Current Fixed Rate Advantage: Fixed rates are currently lower than variable rates, making them a good choice for homeowners looking for peace of mind. At Mortgage Wisdom Corporation, our Expert Mortgage Brokers in Surrey can help you secure the best mortgage rates in Surrey, tailored to your needs.
A Growing Preference for Variable Rates
By late 2024, variable rates began gaining popularity again as prime rate cuts accumulated. Here’s how Mortgage Wisdom Corporation clients chose in November 2024:
- 34% chose a 5-year variable rate.
- 21% chose a 5-year fixed rate.
- 23% chose a 3-year fixed rate.
In typical economic conditions, around 30% of clients select a variable rate, with the majority opting for 5-year fixed rates. As 2025 progresses, variable rates may continue to appeal to more homeowners.
Short-Term Fixed Rates: Bridging the Uncertainty Gap
For those who want to avoid the risks of a variable rate but hesitate to commit to a long-term fixed rate, short-term options like a 3-year fixed mortgage may be a practical solution. This approach provides stability while allowing you to take advantage of potentially lower rates in the near future.
At Mortgage Wisdom Corporation, we also offer flexible solutions like 6-month Rate Relief products to help manage costs while you wait for better market conditions.
Make the Right Choice with Mortgage Wisdom Corporation
When it comes to choosing between variable and fixed rates, you don’t have to navigate the decision alone. At Mortgage Wisdom Corporation, our Expert Mortgage Brokers in Surrey are here to help you secure the best mortgage rates in Surrey and find the perfect product for your unique financial needs.
Whether you prefer the flexibility of a variable rate or the stability of a fixed rate, we’re committed to providing 5-star service and expert advice. Connect with us online, via phone, or visit us in person to make 2025 the year you optimize your mortgage savings.