What are Variable Rate Mortgages?

Variable rate mortgages (VRM) have fixed monthly payments, but the loan rate fluctuates with changes in interest rates. If mortgage loan interest rates go down, more of the payment goes to principal. If interest rates go up, more of the payment goes towards the interest. The interest rate will normally vary with the prime lending rates of the mortgage lender. To view the current prime mortgage rate that all Calgary and Canadian mortgage rates are based on, click here.

As a mortgage loan borrower, variable rate mortgages offer you the benefits of reduced monthly payments and a lower cost of borrowing, compared to fixed rate mortgages.

Adjustable Rate Mortgage Loan vs. Variable Rate Mortgage Loan for Canadians

How is an adjustable rate mortgage loan (ARM) different from a variable rate mortgage loan? While variable rate mortgages have a constant payment, with a varying proportion of the mortgage payment going to interest and principal, an adjustable rate mortgage maintains the proportion of the payment going to principal and interest, but the overall loan payment will vary.

Why would you want an adjustable rate mortgage? The initial interest rate for an ARM is lower than that of a fixed rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan.

How Do I Determine if an Adjustable Rate Mortgage is Best for Me?

Determining whether an adjustable rate mortgage or a variable rate mortgage is best is simple. Try this test. If the possibility of a 0.25% increase in the interest rate has a significant impact on your monthly budget when your mortgage payment changes, then a fixed rate mortgage is for you.

Additionally, consider the overall trend in the prime lending rate for home mortgage loans. If these rates are stable or declining, then ARM or VRM mortgages may be a good option. If you are expecting home loan rates to increase, then a fixed rate mortgage may be a better solution.

Over the long term, history shows that variable rate mortgage loans offer an interest savings over fixed rate mortgages for the same amortization and term. Ask your MBN Mortgage specialist to help further explain this concept.