There are so many different mortgage products available today that selecting the right one can be difficult. Some lenders will try to push mortgage products that serve their own interests, but not necessarily the interests of their clients. So before making this important decision, why not talk to one of our professional mortgage brokers at SaskEquity Mortgages to find the options that are right for you?

One of the more popular mortgage products available today is the variable rate mortgage. This mortgage is also referred to as the adjustable-rate mortgage because it is the type of loan where interest rates and monthly payments can be adjusted as market conditions fluctuate.

With interest rates at an all-time low, there has never been a better time to benefit from this type of mortgage. But before you get too excited, you should fully understand what this type of mortgage offers and whether it is truly right for you.

Variable Rate Mortgages

Whereas your interest rates are locked in place with a fixed-rate mortgage, a variable mortgage can move. The rates will generally float or change over the life of your term. These are all based on decisions made by the Bank of Canada and then mirrored by the lender.

The Bank of Canada’s Prime rate is the general determining factor for this. So, you may notice when you sign up for a mortgage that the rate may be “Prime minus 0.25%”, for instance. When the Prime rate shifts, your lender will follow suit.

The variable rate offered will generally be lower than that of the fixed. The reason for this is there is no protection from changes in the rate. Yes, you can enjoy a lower rate when the Prime rate is low (as they are now), but when they rise, your rate will as well. That can result in major shifts in monthly payment amounts.

Another difference between variable and fixed is that if you break your mortgage, the penalty fee for doing so will generally be far lower. There are also convertible variable mortgages which is a feature where you start with a variable term and can convert to a fixed if you think that the market will continue rising.

Variable mortgages allow for serious savings when the Prime rate is low. And with the convertible feature, you can be protected when those rates continuously rise.

The Inherent Risk of Variable Rate Mortgages

Canadian interest rates have been lower than ever before. For Canadian homebuyers, that means variable-rate mortgages have proven to be a better option on the whole. But the question is, will those rates will stay low or will they rise?

Since the rates have been at their lowest, it is all but certain that they will rise eventually. How much they rise remains in question but rest assured that they will rise. When rates rise, your mortgage payments can change substantially.

And yes, rates are low now, but when they increase, how far will they go? Those with variable-rate mortgages stand to lose a lot of money if rates spike up suddenly. Under ideal circumstances, variable-rate mortgages can be the better option, but fixed mortgages offer protection from uncertainty.

There are three things to be aware of that can shine some light on variable rate mortgages. Understanding those things will help to provide you with the information necessary in determining whether a variable rate mortgage is better or not.

When the Prime Rate Changes, So Does Your Payment

Now is when the risk factor behind variable-rate mortgages comes into play. The variable in a variable rate mortgage is based on that prime rate. The lender that you choose bases its prime rate on the prime rate of the Bank of Canada.

The Bank of Canada has eight meetings during each calendar year. During those meetings, they make monetary policy decisions. Moreover, they decide if they should increase their interest rates or not. Since the Prime has been 3 percent for the last three years, that should indicate the current state of interest rates in Canada.

If the Bank of Canada changes their prime rate, lenders would have to follow suit, generally by the same amount. So, if the Bank of Canada upped their prime rate by 0.25 percent, the prime rate from your lender would likely go up by the same amount.

When the prime rate fluctuates, your monthly mortgage payments go with it. So, if you have a $300,000 home loan, that additional quarter percent of interest would cost about $38 each month, $456 per year, and $11,350 over the entire life of a standard 25-year mortgage.

Dating back to 2007, the Bank of Canada’s prime rate has been as low as 2.25 percent and as high as 6.25 percent. Yes, it has remained unchanged in three years, but that doesn’t mean that it will be that rate going forward.

Should you decide on a variable rate mortgage, understand and be prepared for the chance that your payments could increase as the prime rate increases. That can be a sizable amount to prepare for ahead of time.

Convertible Variable Rate: When to Switch to a Fixed

For those with a variable rate, there is the question of when to switch to a fixed. That convertible feature can be valuable when the market is volatile and huge rate increases are a possibility. There are three factors at play when you look for a variable mortgage. They are the upfront rate, the fine print, and the mortgage advisor.

Upfront Rate. Getting the right rate is the key to saving thousands. Always shop when you are looking for mortgages. You may find that one bank or lender offers a steep discount compared to others, saving you major bucks.

Fine Print. Keep in mind that there are features in each mortgage to be aware of. First, you’ll generally want to look at the fixed rate lock-in feature; this is what it will cost to switch to a fixed rate in the face of rising interest rates.

The second is the penalty involved for breaking the mortgage. Most variable-rate mortgages have a 3-month interest penalty should you terminate the loan early. Some lenders may charge a flat 3% to cut ties. These add risk to a variable strategy.

Mortgage Advisor. Getting the best rate and having a quality rate strategy can mean getting the right partner. They will generally have a strong understanding of mortgage rates and a system in place to avoid watching rates constantly. Most importantly, they will have access to the lenders that offer the best rates around.

Fixed vs Variable Rate: Why Fixed May Still Be the Best Choice

Reading this piece, it seems as though a variable rate is a clear option. But fixed may actually still be the best option. That reason is peace of mind. Worrying about potential rate increases and the cost of your mortgage may not be worth the trouble.

With a fixed-rate mortgage, you can basically “set it and forget it.” Fixed rates are designed to provide that peace of mind. Set it and forget it, so you don’t have to worry. At the end of the day, that peace of mind might be far more valuable than any savings or flexibility provided by the variable term.

If you don’t want to have to watch rates or work with an advisor to watch them, fixed is also the easier route. Moreover, if you don’t plan on moving or selling for a while, flexibility is not something you have to worry about.

SaskEquity is Here to Help

Our qualified mortgage brokers at SaskEquity are happy to answer all of your questions about variable-rate mortgages so you can make an informed decision.

The variable rate mortgage can save you money when the prime lending rate is good. You can also take comfort in knowing that if prime rises, you have the option to convert to a fixed or closed mortgage without penalty. When you decide to convert to a closed mortgage, you get mortgage broker wholesale rates and not lender posted retail rates. With no fuss or hassle, our professional mortgage brokers at SaskEquity are here to help you get the best mortgage rate in Canada. We have access to vast resources and several variable-rate mortgage products, so why not put us to work for you today?