Variable-Rate Mortgages Explained
Spring marks a time of renewal for many Canadians, and for those considering homeownership or mortgage renewal, it is also the perfect moment to reassess financial strategies. One of the most commonly asked questions this year is whether to choose a variable-rate or fixed-rate mortgage. While the topic may not sound exciting, the decision can significantly impact long-term affordability and financial stability.
Understanding the Basics
Every mortgage payment consists of two key components: principal and interest. The type of mortgage you choose determines how these components are structured.
Variable-Rate Mortgages
There are two primary types of variable-rate mortgages:
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Fixed Payment Variable Mortgage: Your monthly payment remains consistent, but the distribution between principal and interest changes depending on the market rate. When rates increase, more of your payment goes toward interest. When rates decrease, a greater portion is allocated toward paying down the principal.
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Adjustable Payment Variable Mortgage: Your monthly payment fluctuates as the interest rate changes. This ensures the loan stays on schedule with the original amortization timeline. Payment amounts increase when rates rise and decrease when rates fall.
Why Some Borrowers Prefer Variable Rates
Historically, variable-rate mortgages have offered lower average interest rates over the life of a loan compared to fixed-rate options. They are particularly appealing during economic periods where interest rates are expected to decline or remain stable.
However, variable-rate products also introduce uncertainty. If the Bank of Canada raises its overnight lending rate, which impacts Prime rates, borrowers may face higher monthly payments or slower principal repayment.
Fixed-Rate Mortgages
Fixed-rate mortgages offer predictability. The interest rate and payment amount remain the same throughout the term. This is ideal for buyers who prioritize consistency in budgeting, are managing tight cash flows, or prefer peace of mind knowing their rate will not fluctuate.
Fixed-rate mortgages can also serve as a hedge against future rate increases, even though the initial rate may be slightly higher than variable options.
Bank of Canada and the Prime Rate
The Bank of Canada (BoC) holds eight scheduled announcements per year, where decisions are made that influence the overnight lending rate. Most lenders base their Prime rates on this benchmark, and your variable mortgage rate is typically set at Prime plus or minus a lender adjustment.
Following the Bank of Canada’s updates is essential. For regular updates and analysis, follow mortgage agent Sischa Maharaj on Instagram at @sischam.
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