Variable Rate Mortgage

Variable Rate Mortgage

The variable rate mortgage (or VRM) has become more popular in Canada over the past few years. With this mortgage, the interest rate changes whenever the prime rate changes. With the current prime lending rate at 2.25% and lenders offering rates near prime, this has become a product of interest. Variable rate mortgages tend to have lower interest rates than fixed term mortgages and on average can save you money in the long term.

If you are okay with your mortgage payment changing from time to time, a variable rate mortgage without fixed payments could be your best option. However, when the interest rate goes go up or down, your monthly mortgage payments are adjusted accordingly. The advantage to having this type of product is that a good portion of your mortgage payments will always be applied to your principal regardless of how much the rate changes.

Typically, most variable rate mortgage products do have the option of fixed or stable payments, meaning your payment amounts do not change from payment to payment. If mortgage rates go up, a larger portion of the payment is applied to interest. If rates go down, a larger portion of the payment is applied to the principal. If you like to budget your expenses each month, be sure to ask for a VRM with fixed payments or an Adjustable Rate Mortgage (ARM).

In today's competitive market with such a vast number of lenders, it is unlikely that VRM interest rates will hit double digits any time soon. The current variable mortgage rate product in Alberta offers an interest rate of 2.40 per cent. This 5-year variable term is specifically designed for those who want to pay off their mortgage quickly.

Frequently asked question: What if prime rate goes up?

History has shown that the prime rate does not usually spike over night. This interest rate is affected by the Canadian economy and the monetary policies set by the Bank of Canada. It typically jumps by only 25 basis points (or a quarter of a per cent) when and if it moves. Sometimes it will not move at all for 12 months. Other times it can move four times in a year.

If the prime rate does increase, most of our variable mortgage rate products allow you to lock into a fixed mortgage rate at any time without penalty. With the help of a mortgage associate you can lock into the current lowest rate in Canada and not just the 'bank posted' rate as most conventional banks or lenders will offer. Plus, this can be done by a simple phone call. You do not have to re-apply or re-qualify for a new mortgage.

The best way to feel good about choosing a variable rate mortgage is to check out statistics on the history of its movement. You can see that the rate adjusts slow enough so you have time to make a wise, informed decision rather than rushing to lock in when you could keep the lower rate and payment offered by the VRM.

A study by Dr. Milevsky of York University shows that between 1950 to 2007, one in seven Canadians who chose a variable rate mortgage saved an average of $20,630 on interest payments per every $100,000 over a 15 year period. These savings were directly due to the lower interest rate enjoyed through a variable rate mortgage.

The following chart shows how the variable interest rate compares to a 5-year fixed term.

Alberta Equity has helped over 50,000 people find and qualify for the best mortgages in Canada for over ten years. We do all of the heavy lifting and ensure that you get the best mortgage rates and product features available. Apply online for a free, no obligation consultation.