Mortgage solution
Variable mortgage rate
The rate follows prime, up and down. What matters is how your payment reacts when it moves, and what it costs to leave.
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. Prime is what moves, following the Bank of Canada’s decisions, so the rate you pay changes each time prime does, without you signing a thing.
Two structures, two risks
With an adjustable payment, the instalment goes up or down at each rate change: the budget moves, the amortization holds. With a fixed payment on a variable rate, the instalment stays the same and the interest share grows when the rate rises, up to the trigger rate, where the payment no longer covers the interest and the lender demands an adjustment. The second structure feels more comfortable. It hides the risk, it doesn’t remove it.
Leaving costs less
Breaking a variable rate generally costs 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 lies elsewhere: if prime rose by one point, would the new payment fit your budget without cutting anything? If not, a variable pushes you into a forced decision at the worst moment. If yes, the flexibility and the smaller penalty work for you.
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 it depends on your structure. With an adjustable payment, yes. With a fixed payment on a variable rate, the instalment stays the same and it is the interest share that 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.
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