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Last updated: May 18, 2022

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Learn about variable rate mortgages

One of the first major decisions you will have to make when purchasing a home is deciding between a fixed rate or variable rate mortgage. There are 2 sub-types of variable mortgages. An adjustable rate mortgage is where your payment moves with the interest rate changes, but has a set amortization. Alternatively, with a variable rate mortgage your payment won’t change with interest rate changes, but your amortization will adjust with interest rate changes. Your variable rate is directly impacted by your lender’s Prime Rate (which is influenced by the Bank of Canada Monetary Policy). When you lock in a variable rate, you aren’t locking in a rate but rather are locking in a spread. For example, if your rate was Prime-1.00% that would mean your rate is 1.45% today (Prime is currently 2.45%) but if Prime Rates move, so does your rate.

Choosing a variable rate mortgage has saved borrowers money historically. It also offers a predictable penalty fee, since it will always be equivalent to 3 months worth of interest, if you decide to break your mortgage before the end of the term. 

One major downside of a variable rate mortgage is that if the prime rate rises and your interest rate also increases accordingly, your amortization or payments could rise, leading to more interest paid.

This decision is both qualitative and quantitative.

Qualitatively, some people might be hesitant to get a variable rate mortgage since there is a certain level of uncertainty that comes with it. Typically, this type of mortgage has more flexible terms and you can take advantage when rates are low without having to refinance. However, if you like the predictability of knowing exactly how much you need to pay per month and when you will be able to pay off your mortgage, a fixed rate mortgage might be the better option.

Quantitatively, variable rates might be extremely competitive in the market today. You could also take a position that interest rate rises will go a different way than the market expects.
Perch empowers Canadians to make more informed decisions when it comes to real estate and building wealth. If you are unsure of whether you should go with a variable-rate or fixed-rate mortgage, create a free Perch profile or speak to one of our mortgage advisors and get personalized insights into your mortgage today. Additional Resources

https://www.canadalife.com/investing-saving/mortgages/fixed-vs-variable-mortgages.html

https://myperch.io/rates

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