Understanding Variable Interest Rate Mortgages

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A variable interest rate can fluctuate during the term. The interest rate varies with changes in market interest rates (typically the bank’s prime lending rate). The mortgage payments can be fixed, or they could change if the interest rate changes – it depends on the lender and type of product.

How it can benefit you:

Historically, variable rates have been lower than fixed rates and could save you more money.
If rates go down, a larger portion of your payment goes towards principal, helping you pay off your mortgage faster.
Your regular payment stays the same even if rates change.

Some risks and disadvantages:

If market interest rates go up during the term, the interest rate would increase and result in more interest being paid to the lender. As a result, by the end of the term more interest may be paid than if a fixed rate had been chosen.
Depending on the lender and the terms, the payment could increase if interest rates increase.

Why are variable rates attractive?

Often, interest rates on variable rate mortgages are lower than fixed rates offered. Whether you are better off with a variable rate versus a fixed rate depends on the movement of the market during the term of the mortgage.

Here are some scenarios to consider:

The payment goes up or down every time the rates change.
Payment stays the same when rates drop and more principal is paid down.
Payment does not change unless market rates increase to ‘trigger’ point (indicated in agreement.) Unless stated otherwise in agreement.

*Source Financial Consumer Agency of Canada

Understanding Variable Interest Rate Mortgages

How it can benefit you:

Some risks and disadvantages:

Why are variable rates attractive?

Here are some scenarios to consider:

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