The 5-year variable rate mortgage fluctuates with short term interest rates, and has a good track record of saving borrowers money over time. Variable mortgages come in two forms: open and closed. A 5-year variable closed option binds borrowers to the terms of the mortgage for a duration of 5 years, while a variable open term allows you to move to a fixed rate at any time, although interest rates on open terms tend to be higher.
Variable rates are usually expressed as a function of the prime lending rate posted by banks, plus or minus a set amount based on the credit conditions at the time. You may, for instance, see a variable mortgage advertised as ‘prime minus 0.5,’ meaning the interest rate would be whatever the posted prime rate is less half a percent: if prime is 3%, your variable rate mortgage would be 2.5%.
The prime rate in-turn moves in conjunction with the Bank of Canada overnight rate. This is the reason why headlines that the Bank of Canada has raised or lowered its lending rate result in your variable mortgage going up or down by the same amount within a few days.
With variable mortgage products your payments can be calculated in one of two
ways: you can pay a set amount each month, with the proportion of interest you pay changing based on the interest rate at the time; or, you can pay a certain amount of principal and a certain amount of interest each month, with the amount of the payment moving up or down as interest rates change. The first option gives you the advantage of paying down more of your principal in today’s falling rate environment while maintaining a constant payment.
While variable mortgages are less popular than fixed rate mortgages, with only 31% of Canadian borrowers taking them, they nonetheless have history on their side. Studies have shown that in the post-war period variable rate mortgages have been cheaper than fixed mortgages more than 90% of the time! Recent history has been no exception:
The simple fact is that most borrowers will generally pay less interest and discharge their mortgage faster with a variable rate. By bearing the interest rate risk on your mortgage you don’t have to pay a financial institution to do it for you!
You can see if a variable mortgage makes sense for you by using the comparison tools available right here at LowestRates.ca!