Variable Rates

Mortgage Variable Rates

Deciding whether to choose a variable rate or a fixed rate is a big decision for many borrowers.

Variable rates come with both benefits and considerations depending on your unique borrowing situation, interest rates, and economic forecasts.

It's common for variable rates to be offered at a slightly better rate than fixed rates - the trade off is that they bare more risk to the borrower.

Now that we know the basics of variable rates, let's dive into MORE info about variable rates.

What makes variable rates... vary?

Variable rates are influenced by the economy and the Bank of Canada's policy interest rate (overnight rate).

The Bank of Canada is responsible for setting the policy interest rate after analyzing factors regarding inflation, the economy etc.

The policy rate which is set by the Bank of Canada goes on to influence the prime rate, which is the rate banks use for basing variable rates off of.

Depending on where the economy is headed, the Bank of Canada adjusts the policy rate in hopes of balancing out shifting factors.

When inflation is low, a lower policy interest rate may stimulate the economy.
When inflation is high, a higher policy interest rate may relax economic activity.

Shifting the policy interest rate helps curb inflation and keep it centered around the Bank of Canada's target rate for inflation (helping to stabilize the economy).

Adjustments in the policy interest rate impact short-term interest rates (variable rates mortgages).

How does shifting the policy interest rate assist with inflation? Take a peek below!

Variable Rates & Inflation

When the economy grows too quickly (inflation rises fast), the Bank of Canada may raise the policy interest rate (which raises variable rate mortgages). With higher variable rates:

• People generally refrain from or are weary about seucring a mortgage due to the high cost of borrowing
• Borrowers who have a higher variable rate become more conscientious of their spending

These two factors help slow the economy, AKA slowing inflation.

With lower variable rates

• Borrowers tend to have lower monthly mortgage payments, allowing them more expendable money to filter into the economy
• Many people purchase property due to the lower barriers to entry and lower cost of borrowing

These factors help grow the economy, AKA contributing to inflation

Variable Rate Mortgage Considerations

Variable rates aren't just any borrower's best friend.

Variable rate mortgage considerations are that:

• With a shifting economy, variable rates may induce stressful borrowing situations due to potential rate hikes
• Variable rates can make financial budgeting more challenging
• A borrowers monthly payments may increase significantly if variable interest rates rise significantly, creating a potential for some borrowers to reach their 'trigger point'.

Variable interest rates generally 'vary' by a small amount. A larger hike or fall of variable rates may be noticed during times of economic uncertainy, such as during a recession, during a war, or after a pandemic.

Have questions about variable rates and how they may impact your mortgage? Connecting with a licensed mortgage broker (such as myself!) can provide valuable insight.

Variable Rate Mortgage Benefits

For some borrowers, a variable rate mortgage is all they'll consider.

Variable rate mortgage benefits are that:

• In the long term, borrowers often save more over all
• With falling variable rates, you'll enjoy more approachable monthly payments
• Variable rates are often offered at lower rates than fixed rates

Wondering If A Variable Rate Mortgage Is Right For You?

There are common factors between borrowers who choose a variable rate.

Some of these factors include:

• You're goal is to contribute large principal payments on a short amortization period (to pay down your balance quicker)
• You'd like a mortgage that's offered with lower initial payments (which is often the case with variable rates because they're generally posted at a lower rate than fixed rates)
• Your plan is to sell your property in the near future

Note: If you have a Home Equity Line of Credit (HELOC), you might be charged variable rate interest on the balance of it.

Connecting With A Licensed Mortgage Broker

Mortgages are complex, but they don't need to be!

Many mortgage solutions exist such as choosing a fixed rate mortgage, or even an adjustable rate mortgage. We won't know which type of interest rate is the best decision for YOU until we've taken a dive into your 'mortgage story'. I'm Chantelle Benzies (licensed mortgage broker); it'd be my pleasure to learn about your lifestyle and goals to make appropriate mortgage situations designed to benefit your unique borrowing situation.

For a no-risk chat about variable rate mortgage and other mortgage solutions, give me a call!

***other conditions may apply to anything written in this article; the information provided on this page should NOT be implicitly relied upon, and may not be fully up to date. Contact us for the most current information***