What is a Variable Rate Mortgage?

real estate agent putting up “sold” sign

What is a Variable Rate Mortgage?

A variable rate mortgage is a type of mortgage in which the interest rate on the loan can change over time. This is in contrast to a fixed-rate closed mortgage, in which the interest rate remains constant throughout the term of the loan. This means that the monthly payments on a variable-rate mortgage can fluctuate, which can complicate budgeting, however, variable-rate mortgages may also offer lower interest rates and lower fees compared to fixed-rate mortgages, which can make them an attractive option for some borrowers.

Searching through real estate listings can be exhilarating, even more so if you are serious about purchasing a home. However, the most is much more complex than finding a home you like and placing an offer. 

While picking a home that suits your current needs is certainly part of the process, there are huge financial implications tied to your purchase which is why you need to think about the entire mortgage term and the mortgage payments that your purchase will incur.

This leads into one of the most important decisions you will make during the closing, which is whether you will opt for a variable-rate mortgage or a fixed-rate mortgage. There are benefits to both types of mortgages, but there is financial uncertainty. No one can predict how the interest rate and variable rate will perform over the next few decades, although many financial professionals can help you evaluate your financial situation to make an informed choice.

With this in mind, it is important to look at the difference between fixed mortgage rates and variable mortgage rates before you close the deal with your mortgage broker.

What are Variable Rate Mortgages?

broker explaining mortgage interest rate changes

A variable-rate mortgage is a great option if you have some flexibility with your monthly payments and the prime rate is low. The prime rate determines the variable rates that are assigned to mortgages. When it is low, your monthly mortgage payments will also be relatively low. If interest rates decrease, your monthly payments can fall even lower. This is one reason why people opt for variable-rate mortgages.

However, interest rates rarely stay level, and while they can decrease, interest rates rise as well. This means that your monthly payments can suddenly increase leaving you with a large mortgage payment you might not have anticipated. This is one reason variable rate mortgages are not recommended for those with financial uncertainty.

The opposite of variable-rate mortgages are fixed-rate mortgages. Those who stick to a budget often prefer the comfort of fixed monthly payments that never change. In this scenario, the prime lending rate during the amortization period becomes the fixed interest rate for the length of the mortgage loan. While this means you may pay more if the interest rate dips, you will never pay more if it spikes up again.

What Influences Mortgage Rates?

There are several factors that can influence mortgage rates. The most important factor is the overall level of interest rates in the economy. When interest rates are high, mortgage rates tend to be high as well, since lenders need to offer higher interest rates in order to compensate for the increased cost of borrowing money. 

Economic conditions, such as inflation, unemployment, and economic growth, can also impact mortgage rates. Inflation can push mortgage rates higher, as lenders need to offer higher interest rates in order to protect the purchasing power of their loans. 

On the other hand, high levels of unemployment and slow economic growth can cause mortgage rates to fall, as lenders are willing to offer lower interest rates in order to stimulate borrowing and support the economy. Additionally, the supply and demand for mortgages, as well as the creditworthiness of borrowers, can also impact mortgage rates.

Should I Consider a Fixed Rate Mortgage?

If you are okay with higher rates in exchange for the safety of fixed payments, a fixed-rate mortgage will be the more affordable product for you. Fixed-rate mortgages protect you when rates increase, but they tend to cost more upfront than variable-rate mortgages.

On the other hand, if your financial system is flexible you can often secure a much lower interest rate on your principal by option for a variable rate loan. You can save money upfront on your purchase since the initial interest rate will likely be much lower than a fixed-rate loan. How much you save over the longer term of your mortgage will vary since rates will fluctuate throughout the life of the loan.

However, it is important to remember that you can refinance your mortgage loan, resulting in a different interest rate down the line. This is a tool often undervalued by homeowners and is a great way to obtain a lower rate, lower interest payments, regular payments, and adjust your mortgage if you discover that you should have chosen a fixed rate mortgage over a variable rate mortgage or vice versa.

Tips for Affordable Mortgage Payments

The mortgage market is complicated, which is why the best way to protect yourself is by working with an experienced mortgage broker.

At John Antle, we believe that all Canadians should have an independent advocate on the lookout for their best interests so they can find the right mortgage contract for their needs and goals. If you are looking for a mortgage lender, contact John Antle to connect with an experienced mortgage broker and discuss your options. 

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