What is a Variable Rate Mortgage?
A variable rate mortgage is a mortgage where the interest rate may change periodically during the term of the mortgage but the monthly payment of the borrower will remain the same, amortization will change.
What is an Adjustable Rate Mortgage?
An adjustable rate mortgage is a mortgage where the interest rate may change periodically during the term of the mortgage and any changes will also change the borrowers payments, amortization stays the same.
Variable or adjustable rate mortgages usually begin with a lower interest rate than a fixed rate mortgage. Lowering market interest rates will make an adjustable rate advantageous to the borrower as you can take advantage of lower rates immediately as rates fall. The risk is you could end up with a higher rate if rates rise.
Why Choose a Variable or Adjustable Rate Mortgage?
You will benefit from a variable rate mortgage product if:
You are comfortable with rate fluctuations to gain a possible long-term interest savings
You have the financial flexibility to accept possible increases in your payments or amortization should the interest rate increase
If you can see into the future and predict interest rates will go down
Variable and adjustable rate mortgages are in most cases closed mortgages but that does not mean you are completely restricted. They will allow you to pay 10-25% extra each year without penalty so that you can significantly pay down your mortgage if you wish.
They are also fully portable meaning you can transfer your mortgage from one property to another in case you decide to move during the term.
If interest rates begin to rise most variable and adjustable products will allow you to convert your mortgage into a fixed term at any point during your term. This can be very advantageous in a rising rate environment.
If you have any questions about which mortgage product or length of term is right for you, please contact one of our mortgage brokers to discuss your situation.