Mortgage FAQ

How Variable vs Adjustable Rates Work in CanadaSome homeowners choose a variable rate, despite the risk of changes in the prime rate, to potentially save more than they would with (typically) higher fixed rates.But there are two types of variable-rate mortgages, and the payment type you choose can affect the overall variable-rate savings advantage.An adjustable-rate mortgage (ARM) keeps your mortgage finances on track, even though your monthly payment (and budget) may shift.However, if you have a fixed-payment variable-rate mortgage (a VRM with a big bank), more or less of your payment goes to interest, which can shrink or grow your amortization — potentially impacting how much interest you pay over your mortgage timeline.Key Points:ARM: Adjusting payments that change with prime.VRM: Fixed payments, but your amortization can shrink or grow with prime rate changes.Trigger rate: If rates rise too far, a VRM balance can grow faster. This can create a trigger point where the bank adjusts you payment amount. Payment shock: A longer amortization or higher balance can mean a much bigger payment at VRM renewal.Break penalty: Both carry a 3-month interest penalty — much lower than breaking a fixed rate.Mortgage goals: An ARM is a better choice for staying on track and potentially saving more.There are two types of variable-rate mortgages: An Adjustable-Rate Mortgage (ARM) has a floating payment amount that rises and falls with changes in the prime rate. If the interest rate moves, the full payment change is usually reflected after the upcoming payment (once a full month with the rate change has passed). A Variable-Rate Mortgage (VRM) has fixed payments like a fixed-rate mortgage, but the interest portion of your payment rises and falls with changes in prime, pushing your 'principal' portion up or down, and therefore, your amortization up or down. If you hit your contract trigger rate, the payment no longer covers the interest portion, and your mortgage balance can grow rapidly — though your mortgage finances can be thrown off track before that point.Adjustable-Rate Mortgage (ARM)Variable-Rate Mortgage (VRM)Payment Amount Changes with PrimeYesNoInterest and PrincipalInterest amount changes, principal amount paid stays on trackWithin payment amount, interest goes up or down affecting amount going to principalMortgage Length (Amortization)Unaffected by interest changesGets longer or shorter depending on the amounts going to principalComes with a Trigger Rate/PointNoYes; if hit, mortgage length and balance can increase fasterRenewal Risk?*No. Mortgage length and balance on track to be paid off as scheduledYes. If mortgage length and balance have increased, you'll pay a much higher payment (or a lump sum)HOW YOU SAVE MORE**If rates go up, mortgage length and balance stay on track and won't cost you more; if rates go down, you'll have extra monthly budget roomIf rates go down, more will go to your principal to pay off your mortgage fasterTHE POTENTIAL COSTIf rates go up, higher payments may STRAIN your budget capacityIf rates go up, you may experience 'payment shock' at renewal, and pay MORE interest over your term if your mortgage length or balance has increasedVariable-rate fixed payments can derail your mortgage goals?Yes, a VRM risks derailing your mortgage goals. The VRM product's fixed payments can provide budget certainty. But the higher the rate goes, the more interest you pay, with less going towards your principal. That lengthens your amortization, which can quickly extend beyond your original loan time — a state called negative amortization.If rates go up and stay up during your term, that negative amortization means you may be in for payment shock when it's time to renew. The above example shows how much higher your renewed mortgage payment might be — in this case, about $569 per month more — just because you have fixed vs. adjustable payments.Of course, if rates go back down during the same term, the amortization may have enough time to recover by your renewal date.