One of the most vital aspects of buying a house in Canada is acquiring a mortgage. A mortgage is a loan with a principal and interest you pay over time. Because these loan types have interest, signing an agreement with the best rate is ideal.
A variable-rate mortgage is an attractive option for many property buyers. Below, we will define a variable rate mortgage and outline its benefits and drawbacks. Knowing more about this mortgage type could make the difference between having a reasonable monthly payment and buying an unaffordable home.
What Is a Variable-Rate Mortgage?
A variable rate is a home loan without a fixed interest rate. Instead of the rate staying the same throughout the loan term, it will fluctuate according to market conditions, while the homeowner's payment amount remains unchanged.
Having a variable-rate mortgage does not alter the amount of money you pay each month toward your home purchase. However, changes to the loan's rate influence how much of the payment goes toward the loan's principal (the amount you borrowed from the mortgage company). Decreased mortgage rates mean more of your regular payment goes toward the principal amount. If rates rise, your monthly payments cover more of the interest.
Variable-rate mortgages can be closed or open:
- A Closed Mortgage tends to have a lower interest rate with limited prepayment options.
- An Open Mortgage allows homeowners to make extra loan payments at a higher rate.
- A more in-depth look at the difference between a closed and open mortgage can be found here
How to Find the Best 5-Year Variable Rate in Canada?
Canada's top lenders and big banks report that as of September 8, 2022, the best high-ratio variable in Canada was 4.25%. The best way to find the best 5-year variable rates is by visiting our rate comparison table. Here, rates from different lenders are live and updated daily.
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How Often the Prime Rate Changes?
The prime rate is the interest commercial lenders charge their most creditworthy clients. It is the starting point for other interest rates, including home loans. Since the prime lending rate serves as a benchmark for mortgage interest rates, its increases could trigger your mortgage company to raise your loan payments to help you pay off the mortgage before the amortization period ends.
The prime rate of mortgage providers comes from the Bank of Canada, which sets the target lending rate. The bank could raise or lower the target rate according to the economy's condition. For instance, if the government wants to boost economic growth, the Bank of Canada will lower its target lending rate to stimulate growth.
There's no way to know how often or when the prime rate will fluctuate. It's unpredictable.
In 2022, How Much Have the Variable Rates Increased?
As of the January 1, 2022, the high-ratio Canadian variable rate was 0.85%. Fast forward to September 8, 2022 and that rate was spiked to 4.25%. That's an increase of 400%.
How Lenders Determine the Variable Rate?
Mortgage companies base their prime interest rates on the prime lending rate from the Bank of Canada. The loan providers set a variable rate as the prime rate pulse or minus a specific amount. For instance, you could sign a contract for a home loan with a variable interest rate of Prime -0.40%.
The prime lending rate will change over time, but its relationship to the prime rate will remain throughout your home loan term.
Advantages and Disadvantages of a Variable Rate Mortgage
Home buyers tend to prefer variable-rate mortgages because of their benefits. For instance, they help people save money because variable rates are usually lower than fixed rates. If you look at the long-term differences between fixed-rate and variable-rate mortgages, you'll see that the latter often leads to more disposable money.
You also have fewer prepayment penalties with variable-rate loans. Since the rates are flexible, you can make additional payments toward your mortgage without incurring additional fees.
A potential drawback of a variable rate home mortgage is its lack of predictability. Fixed-rate loans have the same payments and interest rates for the loan term. Variable lending rates change according to market conditions, so you could have difficulty paying the mortgage principal at a higher rate.
Is a Variable-Rate Mortgage Right for You?
A five-year term for a variable-rate mortgage is a popular choice among Canadian homeowners. However, that doesn't mean it is the best choice for you.
If you are a home buyer with a high income and plenty of savings, you might be more comfortable paying a variable-rate mortgage with a fluctuating prime rate. However, a family on a budget may find it more financially responsible to accept a fixed-rate mortgage because they can budget their income more efficiently according to a monthly mortgage payment that will not change.
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Explore Mortgage Rates With Insurdinary
When buying a new home, you should have peace of mind knowing your mortgage rate is fair and affordable. If you believe a variable-rate mortgage is right for you, turn to Insurdinary to find the best mortgage rate from top Canadian mortgage providers.
Shopping for the best variable rate mortgage alone is time-consuming. The home buying process is long enough, but Insurdinary can help you save time by providing you with different mortgage products and quotes to compare at your leisure. Complete the online quote form today to begin exploring mortgage products.
If you're not quite at the mortgage quoting stage just yet and are still working the numbers, be sure to visit our calculators. There you are able to determine your mortgage affordability, calculate closing costs, and see what your total mortgage payments will be.