Mortgage Foundations - Mortgage Blog #Variable Rate MortgagesMortgage Foundations - Mortgage Blog #Variable Rate Mortgageshttps://www.mortgagefoundations.ca/mortgage_blog/tag/variable-rate-mortgagesFri, 24 Jul 2026 23:59:34 -0700http://zoho.com/sites/<![CDATA[The Difference Between a Variable and Adjustable Rate Mortgage]]>https://www.mortgagefoundations.ca/mortgage_blog/post/the-difference-between-a-variable-and-adjustable-rate-mortgageLearn how variable and adjustable rate mortgages differ in payment behaviour, risk, and cash‑flow impact so you can choose the option that fits your financial comfort.]]>

Episode # 17 of the Mortgage Foundations Podcast

So, you've come across these terms - variable rate mortgage and adjustable rate mortgage, and you're curious to know what exactly sets them apart. Well, let's dive right in and explore the differences between these two commonly used terms in the world of mortgages. When talking about mortgages, the interest rate is a crucial element to consider. It determines the amount of interest you'll pay on your mortgage and affects your monthly payments. Both variable rate mortgages and adjustable rate mortgages have interest rates that can change over time based on the lender's prime rate, but there are some key distinctions between the two. A variable rate mortgage (also known as a static payment variable mortgage) is a mortgage where even as the interest rate changes, your payment remains the same. What does change is how your payment is allocated between principal and interest. As interest rates rise, more of your payment will go towards interest with less towards principal; and vice versa when rates come down. The payment on a variable rate mortgage may need to change if interest rates go too high and the payment isn’t enough to cover any principal at all; which can result in a mortgage that grows instead of reduces. Lenders will commonly contact clients to advise them of options in order to not let this happen; some lenders will even automatically adjust the payment as well to ensure there is always a little bit of principal being paid down. On the other hand, an adjustable rate mortgage is a mortgage where the payment fluctuates in lockstep with interest rate changes. When interest rates go up, so too does your payment; although, when rates come down, your payment does as well. This type of mortgage ensures that your amortization remains the same and you are always paying down principal even when rates are going up. There can be some pain and decreased cash flow when rates are going up; however, a decrease in rates will result in some breathing room due to an increase in cash flow. The frequency of rate adjustments on a variable or adjustable rate mortgage can vary; many lenders typically adjust the rate in the next month following the rate adjustment; while others will adjust it right away. If you have a variable or adjustable rate mortgage, it is important to know when your lender makes their change so you are well prepared. Most lenders adjust their prime rate based on the Bank Of Canada’s policy interest rate, which has the potential to be adjusted as many as 8 times a year; it is recommended to know when these meetings are; the next one is April 10th, 2024. When deciding between a variable rate mortgage and an adjustable rate mortgage, there are a few factors to consider. Firstly, think about your financial situation and how comfortable you are with potential changes in your monthly payments. If you're on a tight budget and prefer a more predictable payment structure, a fixed-rate mortgage may be a better fit. On the other hand, if you have some flexibility and are prepared for potential rate adjustments, a variable rate or adjustable rate mortgage could be worth considering. If you are prepared for some risk and still want the certainty of a fixed payment then a variable rate mortgage may be the most suitable option; however, it is important to understand the risks of that fixed payment. Remember, choosing the right mortgage type is a significant financial decision that should be based on your unique circumstances and goals. Consulting with a knowledgeable mortgage professional can provide insight and guidance to help you make an informed choice. Feel free to reach out at any time to discuss your options as well as your current situation to make sure it is the right fit for you and your family. In conclusion, the key difference between a variable rate mortgage and an adjustable rate mortgage lies in their payment adjustment mechanisms. With a variable rate mortgage you will have some payment certainty; but, this payment may not cover any principal versus an adjustable rate mortgage where you will always be paying down principal; however, may be in for a bit of a ride if rates adjust. Understanding these differences and carefully evaluating your financial situation and market conditions can help you choose the right mortgage option for you and your family.

Listen to the podcast here!
]]>Wed, 07 Aug 2024 13:08:20 +0000<![CDATA[Bank of Canada Rate Cut - Now What]]>https://www.mortgagefoundations.ca/mortgage_blog/post/bank-of-canada-rate-cut-now-whatThe Bank of Canada cut its policy rate by 0.25%, lowering prime to 6.95%. Learn how this affects variable payments, inflation risks, fixed rates, and what may come next.]]>

Episode # 25 of the Mortgage Foundations Podcast

As expected by many, the Bank Of Canada announced this morning that it was cutting the policy interest rate by 25 basis points from 5% to 4.75%. Most lenders are expected to follow suit and cut their prime rate by an equal amount, meaning most will now be at 6.95%.  


This was the first time in 4 years that the Bank Of Canada has cut the rate and more importantly, may have marked the end of their rate hike cycle that began in 2022. 'May' is the important word here as nothing is guaranteed and if it is shown that the Bank Of Canada has cut the rate too soon, we could potentially see them back pedal and have to raise the rates to fix the issue.

  

Today's rate cut announcement was definitely welcome to many people, none more so than those that are currently in an Adjustable Rate Mortgage, which is a variable mortgage where a client's payment fluctuates with changes to their lender's prime rate. When the prime rate increases, so does the payment, and vice versa, when the prime rate decreases, the payment does as well. This is different from a static payment variable rate mortgage, where instead of the payment changing, the ratio of the amount of the payment that goes to principal and interest changes instead.


To put the change into a dollar amount, for every $100,000 of mortgage balance owing, a quarter point change in prime rate equates to a difference of 15 dollars up or down. Therefore, for someone with a $500,000 mortgage balance, today's announcement would mean that their future monthly payments will be reduced by 75 dollars. Admittedly, this is not a huge sum of money and covers a small grocery bill; however, for families that have been struggling with rate increases over the past couple of years, any amount of relief is welcome I am sure.


It is important to note that this morning's announcement does not affect fixed mortgage rates, as fixed rates are affected by the bond market and bond yields. Depending on how the market reacts to the Bank Of Canada's rate cut and the comments made afterwards; we may see fixed rates adjust at some point, but, not in lock step with prime.


As referenced earlier, the Bank Of Canada does need to be careful with further rate cuts and needs to take the financial situation in the US into account before making these cuts. Even though it is true that both countries central banks operate independently from each other, having too large of a gap between each other's policy rate could prove to increase the problem that the Bank Of Canada has been working to fix. Specifically, inflation.


Without getting too deep into the economic reasons why this could happen, I will summarize the key points. A lower policy rate can lead to a weaker dollar since foreign investment may be reduced as lower interest rates are obviously not as attractive to investors. Less demand for the Canadian Dollar means that it may fall in value against other currencies, mainly the US Dollar. If the Canadian Dollar falls too much, we could see the cost of goods increase, and if they increase too much, we could start to see inflation creep back up. This would not only include goods that we import into Canada; it would also include domestic goods that are dependent on imported raw materials.


The other concern that the bank will be paying attention to is whether today's rate cut causes consumers to react and increase spending, including on real estate. While a quarter point cut to the prime rate is not likely to cause many potential home buyers to come off the sidelines, bond markets reacting and causing fixed rates to decrease could. Many potential home-buyers (especially first timers) are more likely to take a fixed rate; therefore, until fixed comes down, qualifying isn't really affected much.


Today's rate cut is definitely a good thing and welcome relief for many Canadians; however, I believe that it may have been a one and done cut for now, and then wait a bit for the next one to gauge the effects. With that being said, I was expecting that the Bank Of Canada would wait till their July meeting for the first cut; I would be happy to be wrong again.

Listen to the podcast here!
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