Bank of Canada Paused the Policy Rate at 2.25%
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a variable mortgage in which the payment adjusts when the BoC policy and the lender’s prime rates change. The interest rate on an ARM floats with the prime rate. As the monthly payment adjusts, the principal payment schedule stays on track, without affecting the loan’s amortization.
Adjustable-Rate Mortgage (ARM) Quick Facts
- Interest rate moves with the lender’s prime rate
- Payment rises or falls when the interest rate changes
- Principal portion stays steady, keeping amortization on track
- Only the interest portion of the monthly payment is affected by rate changes
- Not exposed to a trigger rate like fixed-payment variables
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What Is an Adjustable-Rate Mortgage
An adjustable-rate mortgage ties your rate to your lender’s prime rate, which tracks the Bank of Canada’s policy rate. The defining feature is that your monthly payment changes as soon as the prime moves, so a rate cut lowers your payment and a hike raises it.
An ARM is one of two types of variable mortgages in Canada. The other being the variable-rate mortgage (VRM), a fixed-payment variable, keeps the payment level and instead shifts the split between its principal and interest components. Since an ARM adjusts the payment, the principal portion remains steady, and the loan stays on its original amortization schedule.
Why Adjustable-Rate Mortgages Matter for Mortgages
An ARM trades payment certainty for staying on schedule. The Financial Consumer Agency of Canada notes that “With adjustable payments, the amount of your payment changes if the interest rate changes,” so your budget has to absorb the swings.
ARMs often start below comparable fixed rates and usually cost less to break, typically a 3-month interest penalty. They also avoid the trigger rate that can catch fixed-payment variable borrowers off guard. The trade-off is that payments can climb quickly if the prime rate rises.
How an ARM Compares to Other Rate Types
An ARM sits between a fixed mortgage and a fixed-payment variable.
ARM versus fixed-payment variable: Both float with the prime rate. An ARM adjusts the payment to keep the principal steady; a fixed-payment variable keeps the payment fixed while allowing the principal portion to shrink, which can extend the amortization period.
ARM versus fixed-rate: A fixed-rate mortgage locks the rate and payment for the term. An ARM moves with the prime rate, so it can cost less when rates fall but more when they rise.
Convertibility: Many ARMs let you convert to a fixed rate during the term, which suits borrowers who want to start with an adjustable rate and lock in later.
When you hold a $500,000 ARM and the Bank of Canada raises its policy rate by 0.25%. Prime rises by the same amount, so your rate and your payment both go up by roughly $65 a month on that balance. Your amortization stays on track because the principal portion paid down with each monthly payment remains unchanged.
Common Mistakes and Misunderstandings About Adjustable-Rate Mortgages (ARM)
- Confusing an ARM with a fixed-payment variable mortgage
- Assuming the payment stays the same as prime moves
- Believing an ARM can hit a trigger rate
- Assuming the risks associated with both ARM and VRM are identical
- Assuming an ARM always costs less than a fixed rate
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Frequently Asked Questions (FAQ) About Adjustable-Rate Mortgages
What is the difference between an adjustable-rate and a variable-rate mortgage?
An adjustable-rate mortgage adjusts your payment whenever the prime rate moves, keeping the amortization on track. A fixed-payment variable keeps the payment level while shifting the principal-and-interest split.
Does my payment change with an adjustable-rate mortgage?
Yes. When the lender’s prime rate rises or falls, your payment adjusts accordingly. The principal portion stays steady, so the mortgage stays on its original schedule.
Can an adjustable-rate mortgage reach a trigger rate?
No. Trigger rates affect fixed-payment variable mortgages. Since an ARM adjusts the payment as rates change, the payment always covers the interest due.
Is an adjustable-rate mortgage cheaper than a fixed-rate mortgage in Canada?
Sometimes. ARMs often start lower and cost less to break, but whether they cost less over the term depends on where prime goes.
Can I switch from an adjustable rate to a fixed rate?
Yes. Most lenders let you convert an ARM to a fixed rate during the term, usually at the prevailing interest rates.