Variable Rate Mortgages & How They Work

Variable rate mortgages are getting lots of attention lately as the bank are offering some specials. You will see the variable rates being offered anywhere from prime minus 0.90% to prime minus 1.15%. Prime rate is currently 3.45%. One major bank has their prime rate at 3.60% to make their variable offer seem more attractive. Getting a mortgage at 2.30% when a 5 year fixed rates are offered at 3.35% is pretty attractive for sure. There are some advantages and disadvantages to the variable rate mortgages that you should consider.

The main thing about a variable rate mortgage that I am sure most people are aware of is your rate is going to fluctuate with prime rate. The prime rate is based on the Bank of Canada’s Overnight Rate. This is reviewed, roughly, every month and a half by the Bank of Canada. One thing to consider is just because the Bank of Canada says there is an increase or decrease to their overnight rate, the banks do not have to adjust as they do. There has been instances where the Bank of Canada lowered their rate by 0.25% but the banks only lowered their rates by 0.15%.

Your payments can vary lender to lender as well. Some lenders will base your monthly payments on your variable rate. Some will base your payments on the 3 year fixed rate.

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If your payment is based on the variable rate, your payments will fluctuate as prime rate changes. If your payments are based on the fixed rate, your payments will stay the same, just the amount of interest paid within your payments will be adjusted as prime changes.

A thing a lot of people get mixed up or don’t understand about variable rate mortgages is they are still signed up for a closed term. In the case with these offered discounted rates you are signing for a 5 year closed mortgage. These are not an open mortgage. On a standard fixed mortgage, should you pay out your mortgage early, the lender is going to charge you a penalty of IRD (Interest Rate Differential) or 3 month interest. Whichever is greater. On a variable rate mortgage your penalty is going to be 3 month interest. so your penalty can be significantly less.

Most variable rate mortgages can be locked into a fixed rate at any time. The trick on this is you have to lock in for however long you have remaining on your variable term. For instance if you are in a 5 year variable and your float it for 2 years, if you decide to lock it in,  you have to lock it in for at least the 3 year term you have remaining. Keep in mind, you are not locking it in for the variable rate that you are on. You will be locking it in to whatever the lenders want to offer you for your remaining term.

Make sure to ask when getting a variable rate mortgage, or any mortgage, if there are there any catches? Some of these discounted rates are being offered with catches like not being portable. This means that should you sell your home during your 5 year term, you will have to pay the penalty. The catch on this with the rate is, should you want to go back to a variable rate mortgage, you have to take what they are offering you at that time.

Thanks For Reading. Call, text, or email anytime with any questions or for help to arrange your mortgage.

Scott Bourke

Mortgage Broker – Regional Mortgage Group – Mortgage Alliance

403-598-1055   Sbourke@regionalmortgage.ca

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