How does a Variable Rate Work?

When it comes to mortgages, you’ll often hear about fixed and variable rates. With a fixed-rate mortgage, your interest rate—and your monthly payments—stay the same for the whole term.

So, how does a variable rate work? In this video, we’ll answer that question.


In Canada, the terms variable-rate mortgage (VRM) and adjustable-rate mortgage (ARM) are often used interchangeably by consumers, but they have key differences:

  • With an adjustable-rate mortgage, your monthly payments can change as the interest rate fluctuates, but your amortization period stays the same.
  • With a Variable-rate mortgage, your payment normally doesn’t change, but rather it’s the principal/interest ratio that shifts up or down.


Some lenders, like TD, CIBC, and Manulife, stick with VRMs, while Scotiabank, monoline, and most credit unions more commonly set clients up with ARMs.

Floating rates can help you save money when rates are low, but there’s always a risk they’ll go up. Choosing the right one depends on your situation.

However, some lenders allow you to lock in your variable rate mortgage or adjustable-rate mortgage into a fixed rate at any time.

Still have questions? Our mortgage brokers are here to help you figure it out and find the perfect fit!

Video Highlights:

Understanding Variable Rate Mortgages
An overview of variable-rate mortgages (VRMs) and how they differ from adjustable-rate mortgages (ARMs) in Canada.

Key Differences Between VRMs and ARMs

Explanation of how VRMs maintain consistent payments with a fluctuating principal-to-interest ratio, while ARMs adjust monthly payments based on interest rate changes.

Lender Preferences for VRMs and ARMs
Insights into which lenders in Canada typically offer VRMs (e.g., TD, CIBC, Manulife) versus those that focus on ARMs (e.g., Scotiabank, monoline lenders, credit unions).

The Pros and Cons of Floating Rates
Discussion on how floating interest rates can help borrowers save money when rates are low, along with the potential risk of rising rates.

Expert Guidance from Mortgage Brokers
Reassurance that mortgage brokers can help borrowers choose between VRMs and ARMs based on their unique financial situation.

Takeaways

  • Variable-rate mortgages (VRMs) and adjustable-rate mortgages (ARMs) serve different needs, with VRMs offering stable payments and ARMs adjusting to reflect interest rate changes.
  • Borrowers can benefit from low floating rates but should be prepared for potential increases in interest rates.
  • Choosing the right mortgage depends on individual financial goals and risk tolerance, which can be navigated with the help of expert advice.
  • Some lenders offer the flexibility to lock in floating rates to fixed rates, providing an additional layer of security for borrowers.
  • Understanding lender-specific preferences for VRMs or ARMs can help borrowers align with the best-fit financial institution.
  • Mortgage brokers are a valuable resource for tailoring mortgage solutions and guiding borrowers through complex options.