What is a variable rate mortgage?
Unlike a fixed rate, a variable rate mortgage can fluctuate up or down throughout the contractual term. In exchange for a variable rate term, your lender will allow a much lower pre-payment penalty compared to the fixed rate product.
The variable rate mortgage is dictated by the Bank of Canada’s Prime Rate. The Bank of Canada meets 8 times a year to discuss the key interest rate and whether or not they will increase or decrease the prime rate. Typically, they will not change the rate, though when they do, historically it will be at a quarter precent increase or decrease.
Example - for every $100,000 you’ve borrowed in a variable mortgage, you should expect roughly a $12 change in your payment.
The variable mortgage will provide you with more flexibility as having a variable rate product will allow you to get out of your mortgage with a maximum penalty being 3-month interest.
Example – On a $500,000 mortgage, in a variable rate product, you can expect a standard $2,000 to $2,500 penalty regardless of the remaining months left in the term. In a fixed rate product, you can expect a penalty in the upwards of 5% of the remaining loan balance. In this case of a $500,000 balance at 5%, that penalty would be about $25,000.