Buying your own home is one of the most important financial decisions you’ll make. Choosing the best mortgage can seem daunting as you have many options, but understanding all your options will help you make the right decision.
This article explains the key facts about variable rate mortgages.
Variable rate mortgages: a definition
Variable rate mortgages do not have fixed interest rates. Unlike fixed rate mortgages, the interest rate and monthly payment you made with a variable rate mortgage will change with the prime lending rate your lender sets. Very simply put, your payments could decrease, but they do have a chance to increase.
Variable rate mortgages fluctuate with prime rate
Variable rate mortgages are quoted as the Prime lending rate plus or minus a percentage set by your lender. For example, if the variable rate is prime -0.8%, and the prime rate is 5%, you would pay 4.2% with a variable rate mortgage. This rate fluctuates with the prime rate, and could go up or down.
The prime rate is adjusted by the Bank of Canada, and it depends on the state of the economy.
Popularity of variable mortgage rates
In Canada, fixed mortgage rates are more popular. 66% of mortgages are fixed, though a significant 29% of Canadians choose variable mortgage rates. 4% of Canadians have a combination mortgage.
Advantages of variable rate mortgages
Variable rate mortgages suit people who follow interest rates closely, and who believe that interest rates will not increase, or that interest rates will drop, over the term of their mortgage. However, because interest rates could increase, if you choose a variable rate you must be able to cover potentially higher mortgage payments.
Historical data shows that variable rates are less expensive, over time.
Disadvantages of variable rate mortgages
If you choose a variable rate mortgage, you will be taking a financial risk. If you don’t feel comfortable with this risk, you may want to choose a fixed rate mortgage. Fixed rate mortgages suit people who don’t want to take financial risks, and who want to be sure that their interest rate won’t change over the term of their mortgage. Consider a fixed rate mortgage if you think market interest rates will increase throughout the term of your mortgage. Fixed rate mortgages are generally chosen by homebuyers who don’t have the ability to cover increased mortgage payments.