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This is why I love my variable rate mortgage

  • 2 min read

The decision to choose a fixed or variable rate is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.

Considering today’s economic environment due to the Covid-19 pandemic, the variable rate is staying pretty steady as the Bank of Canada is keeping the overnight lending rate low (at time of this post 0.25%) as part of their measures to help the sidelined Canadian economy.

Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings particularly right now as fixed interest rates have hit an historical low.

A variable rate mortgage often allows the borrower to take advantage of lower rates — the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 2.45 percent, the holder of a prime minus 0.5 percent mortgage would pay a 1.95 percent variable interest rate.

Another reason to give some thought about a variable rate is mortgage breakage costs. Lenders use two methods for calculating your penalty should you break your mortgage prior to the term. With a variable rate you are subject to no more than a 3-month interest penalty. This is something to consider if you have plans to potentially sell your home, relocate or pay the mortgage off sooner than expected. As the title states, Life is variable and if anything Covid-19 and this pandemic has taught us is that life truly is variable.

You could also look at getting the best of both worlds by setting up a hybrid mortgage. Click here to read a post that talks all about this type of mortgage financing option.

As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.

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