A variable rate mortgage is a home loan where the interest rate can rise or fall over time. It is typically based on a simple formula: the lender’s prime rate, which can change, plus or minus a fixed discount that stays the same for the length of your term. This fixed difference is often called the spread.
Because the rate is not locked in, variable mortgages often start lower than fixed rates. That can lead to savings if rates stay steady or decline. The trade-off is that if interest rates rise, often influenced by decisions from the Bank of Canada, your borrowing costs can increase. In short, you are exchanging some stability for potential savings and, in many cases, added flexibility.
When to choose a Variable Rate Mortgage
A Strong Spread
A variable mortgage is often more appealing when there is a meaningful gap between variable and fixed rates. A wider spread gives you a cushion. Rates would need to rise significantly before a fixed rate would have been the cheaper option. Variable mortgages tend to perform best when rates are stable or falling, and become more challenging when rates rise quickly.
Flexibility Matters to You
If there is a chance you might sell your home, refinance, or make changes before your term ends, a variable mortgage can offer advantages. Breaking a variable mortgage is often less costly than breaking a fixed one. In many cases, penalties for variable mortgages are based on about three months’ interest, whereas fixed-rate penalties can be significantly higher depending on the terms.
You Have Financial Breathing Room
A variable mortgage is best suited for households that can handle some fluctuation in monthly costs. In Canada, borrowing costs can shift with the economy, particularly with changes in inflation and interest rates. A good rule of thumb is to ask whether your budget could handle a rate increase of one to two percentage points. If not, the initial savings may not be worth the potential stress over time.
Choosing between a variable and fixed rate mortgage is not just about chasing the lowest number today. It is about finding the option that aligns with your financial comfort, goals, and ability to adapt if conditions change.