Mortgage solution
Variable mortgage rate
The rate follows prime, up and down. What matters is what your payment does when it moves, and what it costs to get out.
How the rate is set
A variable rate is expressed against the lender’s prime rate: prime minus a discount, or plus a premium. The spread is fixed for the term; it is prime that moves, following the Bank of Canada’s decisions. The rate you pay therefore changes every time prime changes, without you signing anything.
Two structures, two risks
With an adjustable payment, the instalment rises or falls at each rate change: the budget moves, but the amortization holds. With a fixed payment on a variable rate, the instalment stays the same and it is the interest share that grows when the rate rises: up to the trigger rate, where the payment no longer covers the interest and the lender requires an adjustment. The second structure feels more comfortable; it hides the risk rather than removing it.
Leaving costs less
The penalty for breaking a variable rate is generally three months’ interest, with no rate differential. For someone who might sell or refinance before maturity, that is often the deciding argument, more than today’s rate. Most lenders also let you convert to a fixed rate mid-term without penalty, but at the fixed rate they offer that day, not today’s.
What you need to be able to absorb
Qualification uses the same stress-test rate as a fixed. The useful question is elsewhere: if prime rose by one point, would the new payment fit your budget without cutting anything? If the answer is no, a variable exposes you to a forced decision at the worst moment. If it is yes, the flexibility and the smaller penalty work in your favour.
Documents to gather
What the lender will ask for.
- Discount or premium against prime
- Adjustable payment or fixed payment
- Trigger rate, if any
- Penalty if you break the term
- Terms for converting to a fixed rate
- Room in the budget if the rate rises
Frequently asked
Does my payment change at every Bank of Canada announcement?
Only if your lender’s prime moves, and depending on your structure: with an adjustable payment, yes; with a fixed payment on a variable rate, the instalment stays the same and the interest share is what changes.
Can you go back to a fixed rate without penalty?
With most lenders, yes, mid-term, but at the fixed rate offered on the day of conversion, for a term at least as long as what remains. The contract sets the conditions.
Have your file reviewed before you commit.
Have my file reviewedDirectory
Financing types
Pick the situation closest to yours.
Contact
Tell Mathieu about your project
Buying, renewing, refinancing or an unusual situation: describe where you are at, even if it is still vague. Mathieu replies with the next steps and the documents to gather.
- Your request goes directly to Mathieu
- Across Quebec, in French and English
- No fee on most residential files