Variable-Rate Mortgage
Definition
A variable-rate mortgage has an interest rate tied to the lender's prime rate, so the rate moves whenever prime moves during your term.
How it works
Variable rates are quoted as prime plus or minus an adjustment, such as prime minus 0.70%. When the Bank of Canada changes its policy rate, lenders typically move prime, and your mortgage rate changes with it.
There are two structures. With an adjustable-rate mortgage, your payment changes as the rate changes. With a true variable-rate mortgage, the payment stays fixed and the split between principal and interest shifts instead — which can extend your effective amortization if rates rise sharply, or trigger a trigger-rate conversation with the lender.
The usual trade-off is flexibility versus certainty. Variable penalties are commonly capped at three months' interest, which makes breaking the mortgage cheaper, but you accept payment or amortization risk in exchange.
Quick facts
- Priced as prime plus or minus a set adjustment.
- Adjustable payments change with rates; variable payments may not.
- Break penalties are usually three months' interest.
Put this into practice
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