Choose a Variable Interest Mortgage and Start Saving Now

A variable interest rate mortgage is a great choice for clients (for purchasing or refinancing a home) who wish to enjoy savings now, and also want to have the option to fix, or lock in to a fixed rate at any time during the term of that mortgage. People choose the variable mortgage, sometimes called a floating or adjustable rate, when the variable amount available is well below the fixed rate for that same term (for example, 5-year term), and the home owner is aware and accepts that the lender may adjust their rate and monthly payment if bank prime rate changes.

How lenders adjust prime rate

Lenders review their bank prime rate every month. If the Bank of Canada (BoC) adjusts the amount at which they loan money to the banks for mortgage lending, then lenders usually follow suit by adjusting their rate, that is, the rate at which they loan money to their customers. Banks often add a premium on top of bank prime rate for products such as their line of credits or home improvement loans.

Key benefits to the customer

Clients who choose the variable mortgage are guaranteed in their contract with the lender a discount off of bank prime. While this amount will change over time, the discount off of prime will remain in effect for the length of the term, which is most commonly five years. While a variable interest rate mortgage may be available for a three-year term, very few lenders offer them. The five-year term is generally deemed a much better value because lenders commit to guaranteeing the discount for a longer period of time.

Summary: For clients not on a limited or fixed income and who accept that their payment and interest rate will fluctuate with bank prime rate over the term of a mortgage, the variable mortgage can be the better choice. Most customers choose the variable rate mortgage when the variable rate is well below the fixed rate for the same term, for example, when the variable rate is bank prime less 0.70% (prime of 3.0% -0.70%, or 2.30%) on a 5-year closed term--as compared to a fixed rate of 4.19% on a 5-year closed term.

LOC compared to variable interest rate mortgage

What about choosing a Line of Credit (LOC) instead of a variable interest rate mortgage? It is generally accepted that choosing a traditional 5-year closed term variable interest rate mortgage offers greater savings from the outset. Why? Because with an LOC, lenders start with bank prime rate and ADD a premium to that, in contrast to the variable mortgage, where lenders start with bank prime and subtract a percentage (such as -0.70%) from bank prime rate.