A mortgage where the interest rate fluctuates with the lender's prime rate, which tracks the Bank of Canada's overnight policy rate. When the Bank of Canada raises or lowers its rate, your lender's prime rate adjusts accordingly, and so does the interest portion of your mortgage payment. There are two types: an adjustable rate mortgage changes your actual payment amount when rates move, while a variable rate mortgage with fixed payments keeps your payment the same but shifts the principal-to-interest ratio.
Why It Matters
Variable rates have historically saved borrowers money approximately 80 to 90 percent of the time over the past several decades. The savings come from starting at a lower rate than fixed options. However, the 2022 to 2023 rate hike cycle was a reminder that variable rates carry real risk -- the Bank of Canada raised its policy rate from 0.25 percent to 5.00 percent in under two years, catching many borrowers off guard. The right choice depends on your financial cushion, time horizon, and tolerance for uncertainty.
Real-World Example
You take a $600,000 mortgage at variable rate of 4.50 percent (prime minus 1.20). Your monthly payment is approximately $3,317. If the Bank of Canada raises rates by 1 percent, your payment increases to roughly $3,634 -- an extra $317 per month. If rates drop 1 percent instead, your payment falls to approximately $3,006, saving you $311 monthly. One major advantage: if you need to break the mortgage early, the penalty is just three months of interest (roughly $5,625 on a $500,000 balance), compared to a fixed rate penalty that can exceed $20,000.
Ontario & GTA Context
Ontario borrowers subject to the federal stress test must qualify at the higher of 5.25 percent or their contracted rate plus 2 percent, regardless of choosing variable or fixed. This means your maximum borrowing amount is the same either way. Many Ontario buyers work with mortgage brokers who can compare variable rate offerings across major banks, credit unions, and monoline lenders to find the best prime rate discount for their situation.
Common Questions
Can I switch from variable to fixed during my term?▾
What is a trigger rate?▾
Is variable always cheaper than fixed?▾
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