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When you apply for a mortgage, you need to choose a variable rate or a fixed rate. Could a variable-rate mortgage be right for you? Check the MoneySense Glossary.
The interest rate on a variable-rate mortgage fluctuates with the lender’s prime rate. (The other option is a fixed-rate mortgage, whose interest rate stays the same throughout the mortgage term.) The mortgage term is typically five years.
While initial rates on variable-rate mortgages are often lower than those offered for fixed-rate mortgages, borrowers are exposed to the risk of increases in the lender’s prime rate, which itself is tied to the Bank of Canada’s overnight rate. When rates go up, the payments on a variable-rate mortgage will increase, or they could stay the same but a greater proportion of each payment will go towards interest rather than the mortgage principal (the amount borrowed), slowing the borrower’s progress toward paying off the loan.
Example: “Emily expected interest rates to decline, so she chose a variable-rate mortgage with an option to convert to a fixed rate if her outlook changed.”
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