While 70% of all mortgage holders across Canada currently have a fixed mortgage rate, this doesn’t mean it’s the best choice. A fixed mortgage often makes borrowers feel like they’re playing it safe. But, historically, variable-rate mortgages have proven to save borrowers the most money as part of a longer-term mortgage strategy. It makes perfect sense to explore this option with one of our experts today.
A variable-rate mortgage fluctuates with the lender’s prime rate throughout your mortgage term. So, while your variable-mortgage payment will remain the same over your term, your interest rate may change based on market conditions. If the prime rate rises or falls, this impacts the amount of principal you pay off each month. When rates on variable mortgages drop, more of your payment is applied to your principal balance. And, conversely, if rates increase, more of your payment will go towards the interest portion of your mortgage.
Benefits of Variable-Mortgage Terms
If you truly want to save money over the term of your mortgage, variable rate is the way to go. In exchange, however, you must be willing to take on the risks associated with fluctuations in rates over time.
If rates fall while you’re in a variable mortgage, more of your payment goes directly towards paying off the principal amount of your mortgage. This means you’ll pay less interest on your mortgage throughout your term – as well as over the life of your mortgage if you remain in a variable rate.
It’s also cheaper to break a variable-rate mortgage – three months’ interest payment vs an interest rate differential (IRD) penalty often associated with breaking a fixed-rate mortgage.
Even if you’re traditionally more conservative when it comes to your finances, if you happen to be buying a home or renewing your mortgage term during a falling rate environment, this would be an opportune time to try out a variable-rate term.
Popularity of the 5-Year Variable-Mortgage Rate
The most popular variable-mortgage term is the 5 year, although they’re available in all increments from 1 to 5 years, with some lenders offering longer terms as well.