Trigger Rates & Variable Rate Mortgages are currently a hot topic; let’s dive right into it! A variable rate mortgage is a mortgage which has an interest rate tied to the Bank of Canada’s prime lending rate. With each variable rate mortgage, there is a relationship between the contract rate and the prime rate. For example, if you have a variable rate mortgage at ‘Prime – 1%’, at the time of this article, the Prime rate is currently 6.45%, your effective borrowing rate is 4.95%.
Needless to say, a variable rate mortgage is polar opposite to a fixed rate mortgage. With a fixed rate mortgage, the interest rate and mortgage payment remains constant during the life of the mortgage term. A variable rate mortgage is generally more suitable for a borrower who can budget fluctuating mortgage payments. Some may also prefer a variable rate mortgage given that the pre-payment penalty for a closed mortgage is generally a 3 month interest penalty; whereas with a fixed rate mortgage, the prepayment penalty is the generally the greater of a 3 month interest penalty and the interest rate differential (IRD), which, depending on the interest rate environment and the mortgage loan particulars, could be costlier than a 3 month interest penalty.