Variable Rates

Variable Rate Mortgage

Variable rates, also known as ‘floating’ rates, are interest rates which fluctuate through out the term of a mortgage.

There are many advantages to choosing a variable rate over a fixed rate, but it's important to consider whether a variable rate will compliment your lifestyle and goals.

Variable rates tend to be offered at a lesser interest rate, but keep in mind they may be a riskier alternative.

To learn more about variable rates, let's take a deep dive below!

Let's Get To It, Why Do These Rates Vary?

Variable rates fluctuate in line with the state of the economy and the Bank of Canada's overnight rate (policy interest rate).

The Bank of Canada analyzes the economy/inflation amongst other factors and sets a policy interest rate.

The policy interest rate (which the Bank of Canada sets) then influences the prime rate, which banks use to base their variable rate mortgages off of.

When the economy faces inflation, the Bank of Canada may increase the policy interest rate to compensate; vice-versa happens when the economy strengthens and inflation is pulled down, the Bank of Canada may lower the policy interest rate.

These shifts in the policy rate help keep inflation from rising above the Bank of Canada's target rate for inflation - ideally keeping the economy stable.

Changes in the policy rate impact short-term interest rates (variable rates mortgages).

How does changing the policy rate help with inflation? Let's find out!

Variable Rates And Inflation

When inflation rises quickly (the economy grows too fast), the Bank of Canada often responds by raising the policy rate, which trickles down to raise variable rate mortgages.

When variable rates are high:

• People are usually discouraged from securing a mortgage/obtaining loans because of the high cost of borrowing
• Due to increased rates, people generally become more frugal and save a higher portion of their income.

These two factors contribute to a slower economy, thus slowing inflation.

When variable rates are low:

• People tend to spend more, filtering more money into the economy
• More borrowers enter the housing market because they can afford to do so thanks to lower variable rates

These two factors contribute to a growing economy, thus increasing inflation.

Now that we understand how variable rates are influenced, let's move on to the perks and risks associated with variable rates.

The Considerations Of Variable Rates

Variable rates aren't for everyone.

The considerations of variable rates are that:

• Economic uncertainty may cause higher stress levels with expectations over rising variable rates
• Variable rates can be tougher to budget for
• If variable interest rates rise significantly, as a borrower your monthly payments may increase significantly (potentially causing you to reach your 'trigger point')

Generally, these variable rates don’t fluctuate by an significant amount; rates may increase from normal fluctuations during momentous inflation or even a recession.

Connecting with a licensed mortgage broker (such as myself!) is a valuable way to learn about the impact fluctuating variable rates may have on your mortgage.

The Benefits Of Variable Rates

Some borrowers love the advantages of variable rates.

The benefits of variable rates are that:

• You'll generally save more on interest long-term
• If interest rates fall, so will the amount you pay towards interest
• The rates offered are generally lower

"How Do I Know If A Variable Rate Is Right For Me?"

Speaking with a licensed mortgage broker who can assess your unique borrowing situation will help you decide whether a variable rate is the right choice for you.

There are many factors which may influence your decision regarding a variable rate mortgage:

• You plan on making large principal payments with a shorter amortization period (so that you can pay off your balance quicker)
• You’re seeking lower initial payments (often the variable rate that’s offered is lower than a fixed rate because it bears a higher risk to you and less risk to the banks)
• You plan on selling your property after a short period of time (~3 years)

Note:Keep in mind that variable rates don’t just impact the interest on your mortgage. If you’ve opened a Home Equity Line of Credit (HELOC), any balance you pull from it will be charged interest at what is also commonly a variable rate.

Still Undecided On Whether A Variable Rate Is Right For You?

I’d love to learn about your mortgage goals to help you secure a fantastic mortgage.

Other rate options exist (like a 'fixed mortgage' or ‘adjustable-rate mortgage’) which is why it’s important to understand your options so you can make informed decisions.

I'm Kyle Benzies (licensed mortgage broker); I'd be happy to guide you towards a type of interest rate which you'll feel comfortable and confident with. I always work ethically and with integrity so you can feel assured your mortgage is in GREAT hands.

For a no-risk chat about variable rates and your mortgage goals, give me a call!

***other conditions may apply to anything listed above. The information provided on this page should NOT be implicitly relied upon, and may not be 100% up to date. It's best to contact us for the most current conditions/program offerings for first time buyers***