How Does a Variable Mortgage Work?
The first thing to know about variable mortgages is how the loan payment plan is structured. Interest rates fluctuate up and down with the Canadian market, offering homebuyers the opportunity to save money over the lifespan of their loan.
However, a loan with a variable interest rate doesn’t necessarily mean your payments go up. Rather, it means the amount of time it takes to pay off the loan may increase. For instance, if your interest rate continually increases each year, more of your steady payment will go toward paying off interest instead of the principal balance of equity. As a result, it will take longer to pay off the cost of the home. Conversely, if interest rates decrease, more of your money will go towards equity and less towards interest. Consequently, you’ll pay off your loan sooner, and for less money.
The cost-saving potential of variable mortgages makes them an attractive loan type in Canada. Applicants should have enough financial security, however, to tolerate a potentially extended term length.
How Do Interest Rates Work in Variable Mortgages?
Variable mortgage rates often start lower than average mortgage rates. This is due to their inherent risk of increasing later on—lenders generally incentivize applicants by offering a short period of guaranteed cost savings.
After the initial period with a set interest rate, your rate will go either up or down each year. Lenders calculate your new interest rate based on their prime lending rate, which in turn is based on the Bank of Canada’s rate.
What Are the Benefits of a Variable Mortgage?
Variable mortgages are like a hybrid between fixed-rate mortgages and adjustable-rate mortgages. In a fixed-rate mortgage, interest rates do not change, and homebuyers have steady, unchanging payments and term lengths. In an adjustable-rate mortgage, interest rates fluctuate with the market, altering payment amounts each year.
Variable mortgages are the middle ground between these two choices. They offer some of the stability of a fixed mortgage in that monthly payments do not fluctuate. They also have some of the cost-saving potential of adjustable mortgages—in that rates and costs may fall.
The primary difference of a variable mortgage that sets them apart from the two is that they are not fully amortizing. The lifespan of the loan will either lengthen or shorten, depending on how the market and interest rates act.
Find Today’s Best Variable Mortgage Rates
Working with a mortgage broker is the most viable option to secure a low-interest variable mortgage. At Today's Mortgage Choice, we’ve spent years building our lender partnerships. Our mortgage advisors are adept at sourcing one-of-a-kind financial solutions that fit the needs, goals, and lifestyles of our clients.
With us, your mortgage rate, term length, and conditions will work in your favour. Save time and money. Book an appointment with us today.