VARIABLE RATE MORTGAGES
Variable rate mortgages are mortgages in which the rate can change during the mortgage term. They are usually 3 or 5 year terms. Lately they have been offered with customized maturities which mean they will come up for renewal at a specific time. The most common is the 5-year term however.
Variable rate mortgages are based on the banks Prime lending rate. Prime rate is based on the Bank of Canada’s rate. The Bank of Canada meets 8 times per year to discuss the overnight lending rate. Usually when the Bank meets and raises rate then the prime lending rate at the bank gets raised also. Also, when the lending rate is lowered this change is also made to the prime lending rate. For the most part this change is made exactly the same. As of late, on 2 separate occasions the Bank of Canada lowered its overnight lending rate by 0.25% each time but the banks chose only to reduce their rate by 0.15% each time.
So currently as of today, July 7th, 2016 the prime lending rate at the bank is 2.70%. Most the lenders today are offering a prime minus mortgage product, with the average being around minus 0.35%. That said, the interest rate for your variable becomes 2.35% which is currently lower than most 4 and 5 year fixed rate mortgages. This make the interest rate quite appealing. Looking at the chart below you will see that over the last 5 years at least variable rates have been on their way down so a pretty safe bet.
Going forward, I personally think that in order to consider accepting a variable rate that you must have a tolerance for risk. It is unlikely that the rate will be further decreased from where it is today. More than likely the interest rate will remain the same for the next while, my guess would be at least a year based on what is happening currently. So definitely a pretty safe bet for now.
Quick Facts about Variable Rates;
If interest rates change then so does your payment. For example, if the rate goes up so does your payment.
Variable rates are based off of Prime and are subject to change with prime rate.
You can lock in to a fixed rate anytime, usually in to a term equal to or greater than the term remaining.
Usually the payout penalty is 3 months’ interest, that said, restricted mortgages have been coming out with much larger penalties. It is important to find out before you sign.