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The comeback of the variable-rate mortgage began Wednesday when the Bank of Canada passed on its third straight opportunity to raise interest rates.

Such a long pause on raising rates suggests cuts are coming. Lower rates would mean it’s go time for variable-rate mortgages, where your cost of borrowing rises and falls in line with the central bank’s overnight rate.

“If I was coming up for renewal, I would choose variable,” said Victor Tran, a mortgage agent with True North Mortgage. “Based on what Bank of Canada Governor Tiff Macklem has presented to the people in Canada, it seems like we pretty much peaked on rates, and I personally think rates will start dropping around summer of next year.”

Variable-rate mortgages could be the most tarnished brand in personal finance. As interest rates fell to historic lows early in the pandemic, they made it possible to buy into an overheated housing market. But when the Bank of Canada reversed course on rates, variable-rate mortgages were vise-like in squeezing borrowers. Payments for some borrowers have gone up by many hundreds of dollars per month.

The unwinding of rates will be much slower and more tentative than the increases we saw in 2022. But each cut will chip away at today’s elevated cost of borrowing. If you lock into a fixed-rate mortgage, you essentially preserve today’s peak rates for the next several years.

Variable-rate mortgages are priced off the prime rate used by lenders for top customers, which today is 7.2 per cent. Mr. Tran said he’s been able to arrange five-year variable-rate mortgages at prime minus 1.2 percentage points, which means 6 per cent.

But there’s a wrinkle here that speaks to a bizarre aspect of mortgage lending today. To get a top discount, you need to have a mortgage with a down payment of less than 20 per cent. Lenders more aggressively discount these mortgages because the borrower must pay for mortgage default insurance.

Borrowers with down payments of 20 per cent or more are considered financially solid enough not to need mortgage insurance. Yet without that safety net, Mr. Tran said lenders are offering variable-rate mortgages at prime minus 0.4 or 0.6 of a point.

What’s popular today with borrowers is a three-year fixed-rate mortgage, with rates as low as 5.7 per cent for insured loans and 6 per cent for uninsured. The appeal is a competitive rate in today’s world, plus a renewal in only three years.

Leah Zlatkin of said the three-year fixed-rate option is ideal for people who have zero tolerance for the risk of more rate hikes in the future.

“There’s a high likelihood that the Bank of Canada will bring rates down,” Ms. Zlatkin said. “But we have no guarantee of that. And the last time the Bank of Canada gave us a guarantee that interest rates were going to stay low, we all saw what happened.”

That’s a reference to a July, 2020, comment by Mr. Macklem that homeowners and businesses could be confident that rates would stay low for a long time. What actually happened was an increase in the overnight rate to the current 5 per cent level from 0.25 per cent at the beginning of 2022.

Choosing a variable-rate mortgage today exposes you to the risk of further rate increases and means a higher cost of borrowing than with fixed-rate mortgages.

But each cut ahead in the overnight rate reduces your cost of borrowing. RBC Economics forecasts a 4-per-cent overnight rate in 12 months, which suggests an insured variable-rate mortgage arranged today would fall to 5 per cent and an uninsured mortgage to around 5.6 per cent. In both those examples, your borrowing costs would fall below what a three-year fixed-rate mortgage costs today.

Mr. Tran reports a split in mortgage choices between clients buying a home and those renewing a mortgage. “A lot of my first-time home buyers are choosing fixed – pretty much all of them, actually. The people who are renewing, or have already done so, surprisingly a lot of them are choosing variable.”

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