When shopping for a mortgage in Canada, one of the biggest decisions you’ll face is whether to choose a fixed-rate or variable-rate mortgage. While fixed-rate mortgages offer predictability, variable-rate mortgages can provide flexibility and savings—especially in a declining interest rate environment.
But is a variable-rate mortgage the right choice for you? In this guide, we’ll explain what a variable-rate mortgage is, how it works, and the potential benefits and risks. Plus, we’ll show you how Homewise can help you find the best mortgage option to fit your needs.
1. What Is a Variable-Rate Mortgage?
A variable-rate mortgage is a home loan where the interest rate fluctuates based on the lender’s prime rate, which is influenced by the Bank of Canada’s policy rate. This means your mortgage payments can increase or decrease throughout the term, depending on how interest rates shift.
💡 Example: If the Bank of Canada lowers its policy rate by 0.25%, your mortgage rate (and potentially your monthly payment) could decrease, saving you money. Conversely, if rates rise, your payment could increase.
2. How Variable-Rate Mortgages Work
Variable-rate mortgages are often offered with either:
- Fixed Payments (most common): The payment amount stays the same, but the portion going toward interest vs. principal adjusts as rates change.
- Adjustable Payments: Payments fluctuate as interest rates change, ensuring the same portion is applied to the principal.
3. Benefits of a Variable-Rate Mortgage
a) Potential for Savings
Historically, variable-rate mortgages tend to offer lower interest rates compared to fixed-rate mortgages. If interest rates decrease, you could save thousands of dollars over the term of your loan.
💡 Curious about your options? Start your pre-approval with Homewise and explore competitive variable-rate offers.
b) Flexibility to Pay Off Faster
Variable-rate mortgages often come with lower prepayment penalties compared to fixed-rate mortgages. This makes it easier to pay off your mortgage early or refinance if needed.
c) Lower Initial Rates
Variable rates are typically lower than fixed rates at the start of the mortgage term, making them attractive to buyers looking to maximize savings early on.
4. Risks of a Variable-Rate Mortgage
While the potential savings are appealing, variable-rate mortgages come with certain risks:
a) Interest Rate Increases
If interest rates rise, your payments (or the interest portion) will increase, potentially straining your budget.
b) Market Uncertainty
Variable-rate mortgages are more sensitive to economic conditions and market trends, which can lead to unpredictable payments.
🏠 Pro Tip: To mitigate risk, you can apply for pre-approval with Homewise and lock in a rate cap for added protection.
5. Fixed-Rate vs. Variable-Rate Mortgages
Deciding between a fixed or variable-rate mortgage depends on your financial goals and risk tolerance. Here’s a quick comparison:
Feature | Variable-Rate Mortgage | Fixed-Rate Mortgage |
| Interest Rate | Fluctuates with market conditions | Stays the same throughout the term |
| Monthly Payments | May change based on rate fluctuations | Consistent for the entire term |
| Initial Rate | Lower than fixed rates | Slightly higher |
| Best For | Risk-tolerant buyers, potential savings | Buyers seeking stability and predictability |
For more in-depth insights, check out our article on Fixed vs. Variable Mortgages.
6. Who Should Choose a Variable-Rate Mortgage?
Variable-rate mortgages are best suited for:
- Buyers comfortable with risk who are prepared for potential payment fluctuations.
- Short-term homeowners who may sell or refinance before rates increase significantly.
- Financially flexible buyers who can handle market volatility.
7. How to Manage Risk with a Variable-Rate Mortgage
If you choose a variable-rate mortgage, here are a few strategies to reduce your risk:
- Stress Test Your Budget: Calculate your payments at higher interest rates to ensure you can handle potential increases.
- Accelerate Payments: Make additional payments toward the principal when rates are low.
- Set a Rate Cap: Some lenders offer rate caps that limit how high your rate can rise.
- Stay Informed: Monitor Bank of Canada announcements and market trends to anticipate potential rate changes.
8. How to Get the Best Variable-Rate Mortgage
To secure the best variable-rate mortgage in Canada:
- Improve Your Credit Score: Lenders offer better rates to borrowers with strong credit profiles.
- Compare Offers: Don’t settle for the first rate you see. Use Homewise’s comparison tool to explore multiple lenders.
- Get Pre-Approved: This locks in your rate and gives you a clear picture of your budget. Start your pre-approval now.
9. Refinancing and Variable Rates
If you currently have a fixed-rate mortgage, refinancing to a variable rate can help you take advantage of lower interest rates. This can be especially beneficial if market rates are expected to decline.
For more on refinancing, check out our article on mortgage refinancing.
10. Why Choose Homewise for Your Mortgage?
At Homewise, we simplify the mortgage process by working with over 30 lenders to find the best rates for our clients. Whether you’re interested in a variable-rate mortgage or want to explore other options, our platform helps you secure the best deal quickly and easily.
Explore our real estate listings to find your dream home, and let Homewise take care of the financing.
11. Conclusion
Variable-rate mortgages offer exciting opportunities for savings but come with certain risks. By understanding how they work and carefully managing the potential for interest rate fluctuations, you can make the most of your mortgage.
Ready to explore variable-rate mortgages? Start your journey with Homewise’s online application and let us help you secure the best mortgage for your home.
