All About Variable Rates
Variable rates are based on Prime Rate and the Bank of Canada’s overnight rate, can cause fluctuating or static payments. These payments have cheaper penalty when breaking your mortgage.
The banks generally change their prime rates a few days after the Bank of Canada sets its interest rate target for this overnight rate. In other words, when the overnight rate goes up, the prime rate will follow suit, and when it goes down, prime rate will soon follow.
A variable rate is slightly lower than a fixed rate in most cases. One of the major risks to a variable rate is that your monthly payment will increase due to the fluctuations. This also means that your rate will most likely change with these inflations. A couple of reasons why a variable rate might be the best fit for you:
- You’ll have a flexible budget and feel comfortable with fluctuating interest rates
- You want to pay mortgage off quickly
Pros:
- Potentially lower costs over time. If interest rates remain the same or fall during your term, you’ll pay less interest with a variable-rate mortgage than you would with a fixed-rate mortgage.
- Minimal break penalties. Most lenders charge three months of interest if you need to break your variable-rate mortgage contract.
- Ability to switch to a fixed-rate mortgage. Many lenders will allow homeowners with a variable-rate mortgage to change to a fixed-rate mortgage at any time.
Cons:
- Lack of stability. If interest rates rise, you could end up paying more than you would have with a fixed-rate mortgage.
- Converting could cost you more. If you convert to a fixed-rate mortgage, it will be at the current interest rates — which might be higher than they were when you took out your mortgage.
When it comes to choosing a variable rate, there’s two common types of a variable rate: static variable and floating variable. Rising rates aren’t just for concern for homeowners, but also causes concern to investors and real estate professionals who rely on the industry and may also be facing uncertainty.
Static Variable:
- The answer is a variable-rate mortgage where payments stay the same instead of rising to reflect higher borrowing costs. Static payments mean your lender is using more of your payment to cover your rising interest costs and applying less against principal.
Floating Variable:
- When prime rate went to a historical low during the pandemic, it lowered mortgage rates for thousands of variable-rate holders. Some are now enjoying floating rates as low as 1.50%.
- But for new borrowers, variable rates have largely lost their appeal since prime rate has very little room left to fall, if at all.
It is PARTICULARLY important to have a clear understanding of the implications when it comes to variable rate mortgages and what’s best for you. It makes a significant difference in future planning and can impact you in incredibly substantial ways.
At GLM Mortgage Group, we know what questions to ask. We have relationships with the lenders that you know about and the lenders you don’t. We would be pleased to educate you on the financial options available to you. We want you to make the best decision possible on the mortgage you are committing to. Call us anytime for a FREE consultation on the mortgage products available to you.
