Variable Rate Mortgages - Flexibility & Potential Savings
Take advantage of market fluctuations with flexible variable rate mortgages that can offer lower rates and potential savings
What is a Variable Rate Mortgage?
A variable rate mortgage is a home loan where the interest rate can fluctuate throughout your mortgage term based on changes to the lender's prime rate. Unlike fixed-rate mortgages where your rate stays constant, variable rates move up or down in response to the Bank of Canada's policy rate decisions.
Potential Lower Rates
Variable rates historically average lower than fixed rates over time
Rate Flexibility
Benefit from rate decreases when the Bank of Canada lowers rates
Conversion Options
Convert to a fixed rate at any time during your term
Current Variable Rate Ranges
These rates are subject to change based on lender prime rates and market conditions
5.30%
to 5.80%
5.25%
to 5.75%
5.20%
to 5.70%
5.15%
to 5.65%
5.10%
to 5.60%
Rates shown are approximate and vary by lender, credit score, down payment, and property type. Contact a Sutton mortgage specialist for current rates specific to your situation.
Key Benefits of Variable Rate Mortgages
Variable rates are typically lower than fixed rates, potentially saving you thousands over your mortgage term
Benefit immediately when rates drop without having to refinance or break your mortgage
Breaking a variable rate mortgage typically costs only 3 months interest, not the IRD calculation
Lock in a fixed rate at any time if you expect rates to rise significantly
Take advantage of economic cycles and central bank policy decisions that lower rates
Choose between adjustable payment or fixed payment variable rate options
Variable Rate Types Explained
Your payment amount changes when the prime rate changes. When rates go down, you pay less; when they go up, you pay more.
Your payment stays the same, but the split between principal and interest changes with rate fluctuations.
Your rate has a maximum ceiling it cannot exceed, providing protection against significant rate increases.
Who Should Choose Variable Rates?
Variable rate mortgages are ideal for certain borrower profiles
If you're comfortable with payment fluctuations and understand that rates can go up as well as down, you can potentially save significantly with variable rates.
If economic indicators suggest rates may decline or stabilize, variable rates allow you to benefit without refinancing costs.
With a stable income and financial cushion, you can absorb potential payment increases without financial stress.
If you plan to sell within a few years, the lower penalties of variable rates make them attractive, especially if you need to break your mortgage.
With substantial discretionary income, potential rate increases represent a smaller portion of your budget, making variable rates less risky.
Those who want the flexibility to lock in a fixed rate later if market conditions change can start with variable and convert when needed.
Variable vs Fixed Rate Comparison
| Feature | Variable Rate | Fixed Rate |
|---|---|---|
| Interest Rate | Fluctuates with prime rate | Stays constant |
| Payment Amount | Can change (adjustable) or stay same (fixed payment) | Stays constant |
| Rate Level | Typically 0.5-1% lower initially | Higher but guaranteed |
| Breaking Penalty | 3 months interest (lower) | IRD or 3 months (higher) |
| Risk Level | Higher - rates can increase | Lower - complete certainty |
| Conversion Option | Can convert to fixed anytime | Cannot convert to variable |
| Historical Savings | Often saves money over long term | Provides peace of mind |
| Best For | Risk-tolerant, flexible borrowers | Risk-averse, budget-focused borrowers |
How Variable Rates Work
Variable mortgage rates are calculated as the lender's prime rate minus or plus a discount or premium. For example, Prime - 0.50% means if prime is 6.00%, your rate is 5.50%.
When the Bank of Canada changes its policy rate, lenders typically adjust their prime rates within days. Your variable mortgage rate adjusts automatically with these changes.
With adjustable rate mortgages, your payment changes with rate changes. With fixed payment variable, your payment stays the same but more or less goes to principal vs interest.
Most variable rate mortgages allow you to convert to a fixed rate at any time during your term, giving you an exit strategy if rates are rising significantly.
Converting to Fixed Rate
When to Convert
- When the Bank of Canada signals multiple future rate increases
- If you're approaching your maximum comfort level for payment increases
- When fixed rates are still relatively competitive with your current variable rate
- If your financial situation has changed and you need payment certainty
- When economic indicators suggest a rising rate environment ahead
Conversion Process
- Contact your lender or mortgage broker to request conversion
- Choose your new fixed term (remaining term length or longer)
- Review and accept the fixed rate being offered
- Sign conversion documents (usually no legal fees required)
- Your new fixed rate takes effect, typically within days
Timing Considerations
The fixed rate offered for conversion is typically the lender's posted rate, not their discounted rate. This means it may be higher than what new customers are getting. However, the convenience and certainty of converting can still be valuable, especially if you expect significant rate increases. Always compare the conversion rate with current market rates and consider refinancing if there's a substantial difference.
Variable Rate Mortgage Calculator
Estimate your monthly payments with a variable rate mortgage
Monthly Payment
$3,070.44
Total Paid
$921,132
Total Interest
$421,132
This calculator provides estimates based on the current rate. With a variable rate mortgage, your actual payments will fluctuate as interest rates change. Contact us for a detailed analysis including rate scenarios and stress testing.
Understanding Rate Changes
The Bank of Canada sets the policy interest rate (also called the overnight rate) eight times per year. This rate influences what banks charge each other for short-term loans, which in turn affects the prime rate that lenders use for variable mortgages.
When the Bank of Canada raises or lowers its rate, lenders typically adjust their prime rates within 24-48 hours, and your variable mortgage rate changes accordingly.
Rate Decrease (0.25%)
On a $500,000 mortgage, a 0.25% rate decrease saves approximately $70-75 per month, or $840-900 per year in interest payments.
Rate Increase (0.25%)
On a $500,000 mortgage, a 0.25% rate increase costs approximately $70-75 per month more, or $840-900 per year in additional interest payments.
All variable rate mortgages must pass the mortgage stress test, which means you're qualified at a rate that's 2% higher than your contract rate or the Bank of Canada's qualifying rate, whichever is higher. This ensures you can afford payments even if rates increase significantly.
Tips for Managing a Variable Rate Mortgage
Set aside savings equal to 1-2% of your mortgage balance annually. This cushion helps absorb payment increases without impacting your lifestyle.
When rates are low, use the savings to make lump sum payments or increase your regular payments. This reduces principal faster and provides a buffer for rate increases.
Stay informed about Bank of Canada announcements and economic indicators. Understanding rate trends helps you make timely decisions about conversion or prepayment strategies.
Determine the maximum rate increase you can comfortably handle. If rates approach this threshold, consider converting to a fixed rate for peace of mind.
Meet with your mortgage advisor at least annually to review your mortgage strategy, discuss rate forecasts, and assess whether your current approach still makes sense.
Budget as if your rate is 1-2% higher than current. This creates a natural buffer and makes any rate increases easier to absorb without lifestyle changes.
Consider a fixed payment variable rate mortgage for budget stability. Your payment stays constant, but you still benefit from rate decreases through increased principal reduction.
Familiarize yourself with your mortgage terms, including conversion privileges, prepayment options, and any caps on rate increases. Know your options before you need them.
Frequently Asked Questions
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