A variable rate mortgage is a mortgage where the interest rate may change periodically during the term of the mortgage, but the monthly payment of the borrower will remain the same. As a result you could end up paying more or less towards the principal of your mortgage depending on the interest rate. If the interest rate increases, the amount applied to the principal will decrease. If the interest rate decreases, the amount applied to the principal will increase.
Variable Rate Mortgage Vs Adjustable Rate Mortgage
Sometimes a variable rate mortgage is confused with an adjustable rate mortgage, but they are not the same. In an adjustable rate mortgage, if the interest rate rises, the borrower’s monthly payment will rise. With a variable rate mortgage, the monthly payment stays the same and you then pay down less of the principle each month with more money going to interest.
Why you should opt for Variable Rate Mortgages
Variable rate mortgages have historically been a better deal for the borrower in times of high fixed rates and lower prime or bank of Canada rates. The spread or difference between variable and fixed rates has been approximately .50% for the quite some time and we have had periods where the difference has been as much as 1.0% because of market conditions. It is usually not something that first time buyers will look at as they need the security of being in a faxed rate and cannot risk a quick change in the amount they pay each month as can happen in a variable rate mortgage.
Many of our more seasoned mortgage holders will consider variable rate mortgages because of their ability to be able to make a larger payment if they needed to should the variable rate change. Many investors will also use variable rates as they are not as concerned with paying down principal and are more interested in cash flow for their investment property. The lower rates of a variable rate mortgage can be very attractive for just that reason.
Variable rate mortgages are tied to the prime rate set by the banks and the bank of Canada, with that rate currently at 3.0% and having not moved for four years, we are seeing more people wanting to investigate the variable rate mortgages. The spread today would look like this, 5 year fixed rates at 2.89% and variable rates at 2.35%, so a .54% difference between the two products. A half a percent may not seem like much but amortized or 25 years it starts to become a big difference in money paid towards your mortgage.
One of the other features of a variable rate mortgage is that because it is tied to the Bank of Canada rate and they only meet every two months to set the rate. Usually you would have considerable time to react to any major changes and most lenders will allow you to switch to a fixed rate at any time.