A variable rate mortgage is historically lower than its fixed rate mortgage counterpart, resulting in less interest charged over the life of your mortgage. Plus penalties may be less should you require 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, and that means a smaller portion of each mortgage payment goes towards paying down the principal.
When the Bank of Canada prime rate goes down, so too does your mortgage interest rate, and that means your mortgage payment appends a larger portion to 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 associate with variable rate mortgages are “prime minus” or “prime plus” a percentage.
For Example: Prime minus 0.5%. So if the prime rate is 3.2%, then the interest rate is 2.7% (3.2% – 0.5% = 2.7%).
- Typically you will see the variable rate lower than the fixed rate.
- Three (3) month interest penalty however, if you are considering a change within 5 years, having a 3 month interest penalty could save you a considerable amount.
- Option to lock into fixed rate. You would lock into the current posted 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 create budgeting concerns.
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