Variable Rate! Why is it such a spicy mortgage topic right now?!
With current Canadian Economics, “variable rate” could sound a little, shall we say, “unnerving”?
The top question we currently receive is “should we go with a variable rate or fixed”?!
A variable rate mortgage is historically lower than its fixed-rate mortgage counterpart, resulting in significantly less interest charged over the life of your mortgage. Plus – penalties tend to be less, should you require/request a change.
A variable rate mortgage is tied to decisions made by the Bank of Canada, and it is those decisions which influence what we call the prime rate.
If the Bank of Canada prime rate goes up, so too does your mortgage interest rate, which then results in a smaller portion of each mortgage payment going towards paying down the principal.
Variable-rate mortgage interest rates fluctuate based on the prime lending rate, which in turn, is tied to the Bank of Canada overnight rate. Common language you will hear associated with variable-rate mortgages, are “prime minus” or “prime plus” a percentage.
For Example: “Prime minus 0.5%.” So, if the prime rate is currently 3.2%, then the effective variable interest rate will be 2.7%. (3.2% – 0.5% = 2.7%).
With all this said about variable rates, we pride ourselves on matching our customers to the right mortgage product for them. Click below to view all of the mortgage types we offer, including revenue property mortgage, progress draw mortgage, and fixed-rate mortgage.
- Typically, and historically, you will see the variable-rate lower than the fixed rate.
- Only three (3) month interest penalty. If you are considering a mortgage change within 5 years, having a (3) month interest penalty could save you a substantial amount.
- Option to lock into fixed rate. At any time, you are able to lock into the current posted fixed rate for a period equal to or greater than the current remaining term.
- You’ll likely experience rate fluctuates based on shifts in the prime lending rate. This can create budgeting concerns.
Additional notes from our Broker – Bob Reader
Variable VS Fixed Rate?!
Inflation, pandemic, drought, supply chain, employment, and debt!!
That’s a lot to consider when trying to decide what type of mortgage is best for you.
One source of information that provides excellent summarized projections is the IMF (International Monetary funds) https://www.imf.org/en/Publications/WEO
The IMF organization projects that the supply chain issues, and pressures causing inflation, will subside later this year. If that happens as projected, Mortgage Rates will surely stabilize.
Governments do not like to move the prime rate unless they detect a desperate need. ( https://www.ratehub.ca/prime-mortgage-rate-history ). If the prime rate is increased too much, it will cause a lot of Canadians to default on Credit. The Bank of Canada will be very cautious with these increases if at all possible.
A Wise Variable Plan
The prime rate would need to increase 5 – 6 steps (.25% increments per step) to equal the current 5-year fixed rate.
**Save huge interest; If a client makes some use of the mortgage pre-payment privilege, they can effectively set their payment amount, as if they had taken the 5-year fixed rate. The current difference between the fixed rate and variable rate is approx. 1.5%. That entire difference would be directly applied to the principal, resulting in saving thousands in interest! **
Let us show you how it works! We are happy to help!
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From variable-rate mortgages to helping you complete our online mortgage application form, we are always available to answer your questions on any topic related to homeownership.
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