A variable rate mortgage, also known as an adjustable rate mortgage is defined as a mortgage rate that is not fixed for the entire term you have chosen.  Your interest rate is dependent on prime rate and your interest rate will change as the prime rate changes. For instance, if a lender is currently offering a variable rate of prime + 0.15% and prime rate as of August 12, 2009 is 2.25%, this makes your effective mortgage rate 2.40%.

Most variable rate mortgages are also convertible. Meaning you can choose to convert your variable rate mortgage into a fixed rate term at the rate that is available upon the day of conversion.

HOW IS YOUR PAYMENT DETERMINED WITH A VARIABLE RATE MORTGAGE?

 

Most lenders will base the monthly/bi-weekly/weekly payment on your desired amortization and variable rate available at the time. (i.e 2.40%) You will see some payment fluctuation if prime rate goes up or down with 30 days advance notice.

There are also a couple of lenders who will allow you to set your own payment amount instead of having your payments set at the interest rate on closing date. The lender will base your payments on a higher rate for your desired term. It is actually the difference of your higher payment amount that goes towards the principal and you effectively pay your mortgage balance down faster!

IS A VARIABLE RATE MORTGAGE FOR YOU?

Historically, the main advantage of a variable rate term over a fixed rate term is you end up saving interest in the long term.  If you are not risk adverse and it is acceptable to have some payment fluctuation, a variable rate mortgage term may be right for you. If you have a strict budget and payment fluctuations cause stress for you, fixed rate is probably a better route.

IS THERE ANYTHING ELSE I SHOULD KNOW ABOUT VARIABLE RATE MORTGAGES?

There are a couple of things to be aware of when thinking about a variable rate. You want to ensure your interest will compound semi-annually and not monthly. If you are planning a move before your term is up, ensure your variable rate mortgage is portable, meaning you can take it to your new home. On that note, in the event you end up paying off the mortgage prior to the end of your term, find out how your payout penalty will be calculated.

As mentioned above, most variable rate mortgages are convertible, meaning you can convert your variable term to a fixed term at any time without penalty. Read the fine print to understand what rate will be available to you if you choose to convert. Some lenders will offer you their best discounted rate available on the day of conversion, some lenders add a premium to the conversion rate. Bottom line, read and understand the fine print. Your mortgage broker is here to answer any questions you may have.

 

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