A variable-rate mortgage is a home loan where the interest rate can change during the term, usually based on the lender’s prime rate. This means your payments or the portion applied to interest and principal may fluctuate over time.
How It Works
Variable rates are tied to the lender’s prime lending rate, which moves with the Bank of Canada’s policy rate. If rates go down, more of your payment goes toward the principal. If rates rise, more goes toward interest, and your payments may increase depending on the mortgage structure.
Benefits
- Lower initial rates: Variable mortgages usually start with lower rates than fixed mortgages.
- Potential savings: If interest rates stay low or decrease, borrowers can save money.
- Flexibility: Some variable mortgages allow switching to a fixed rate if desired.
Drawbacks
Variable rates come with uncertainty. If interest rates rise, your payments or interest costs will increase. This makes budgeting harder and can lead to financial strain if rates climb significantly.
Final Thoughts
A variable-rate mortgage can offer savings if rates remain low but carries the risk of higher costs if rates rise. It is best suited for borrowers who are comfortable with risk and can handle fluctuating payments.