Variable Rate Mortgage

Variable rate mortgages are comprised of the same components as a fixed-rate mortgage, except that the interest rate is not fixed. The interest rate varies on a regular, usually monthly, basis. Generally, a variable rate mortgage offers a lower mortgage interest rate than a fixed mortgage. The difference is that it will change as interest rates change, so this can be a big advantage to you when interest rates are falling. On the other hand, such a feature can be a disadvantage during periods of rising interest rates.

While payment amounts under a variable rate mortgage are fixed for a specified term like payments under a fixed-rate mortgage, rising interest rates mean less of your monthly payment is being applied to the reduction of your original loan amount. During periods of high or rapidly rising interest rates, you could find that none of your payment is being applied to the original capital loan amount. You could even experience a period in which interest charges exceed your fixed payment, and your mortgage actually increases in size.  Because of these potential downsides, considerable care should be taken when considering a variable rate mortgage.

Borrowers need to understand the risks associated with variable rate mortgages.  In addition, in most cases variable does not mean open and borrowers are still committed to staying with the financial institution for a fixed term which in most cases is five years. 

Every individual and situation is different.  Borrowers should fully understand the benefits of a specific mortgage product, along with its risks and limitations.  Professional advice should always be obtained, and in many cases mortgage agents and brokers can provide financial assistance and consultation. 

Some Advantages of Variable Rate Mortgages

  • History shows that borrowers are better off with variable rates because  rates are typically lower
  • When mortgage interest rates go down, borrowers will have lower mortgage payments. If interest rates go down and the amount of the mortgage payment does not change, borrowers will have more funds go towards the principal

 Some Disadvantages of Variable Rate Mortgages

  • Mortgage payments have the potential to significantly vary from month to month
  • Borrowers will face increased mortgage payments if mortgage interest rates rise
  • Individuals find variable rate mortgages more difficult to manage as a result of possible mortgage payment fluctuations

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Best Mortgage Rates

Variable Rate 1.94%
1 Year 2.34%
2 Year 2.14%
3 Year 2.44%
4 Year 2.49%
5 Year 2.49%
10 Year 3.84%

April 27, 2017

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