After a couple of years in the industry…ok, decades…we’ve become a little laid back when it comes to mortgage lingo. But, after being called out (by our own team member) we’re setting the record straight. It’s time we get clear about the difference between a variable rate mortgage and an adjustable rate mortgage.
What is a Variable Rate Mortgage?
Whenever those in the mortgage industry are talking about a mortgage product that isn’t a fixed rate, we tend to just use ‘variable rate’ as the blanket term. The debate usually comes down to fixed-rates vs. variable rates anyway, so why muddy the water?
A variable rate mortgage is a type of floating rate mortgage. This means, your interest rate is dependent on the Prime rate. Prime rate is the interest rate used by your lender or bank when lending to clients. Their Prime rate is affected by The Bank of Canada’s overnight lending rate.
With us so far?
When the Bank of Canada makes a change to its lending rate, it trickles down to you, the consumer. This year, the Bank has made a few rate increases which has increased interest rates for variable rate mortgage holders.
While your interest rate may increase, your payment will likely not increase.
All it means is that more of your payment will go towards interest versus your principal. If rates fall, more of your payment will go towards principal.
What is an Adjustable Rate Mortgage?
Nearly everything about an adjustable rate mortgage is the same as a variable rate mortgage. It’s a type of floating rate mortgage, impacted by changes made to the overnight lending rate by the Bank of Canada.
The main difference is your payment amount.
When interest rates change, your mortgage payment will change.
If rates rise, your payment will increase. If rates fall, your payment will decrease. Your payment is adjusted.
The pro to this type of mortgage product is that your amortization period will remain the same. You will always be making the same payment towards principal, it’s just the interest portion that will change.
Cons of an Adjustable Rate Mortgage
When you hear the media talking about people not being able to afford their mortgage payments because of rate increases, it could be because they are in an adjustable rate mortgage vs. a variable rate mortgage.
For example, a rise of .75% on a $350,000 mortgage is $94 a month. There’s only so much budgeting you can do to manage that type of increase, especially after the increases we've had this year.
Remember, There’s So Much More Than Interest Rate
Look, we know mortgage rates are important, but people spend too much time trying to find the lowest rate (yet, they don’t even blink an eye on a 19.99% interest rate on a credit card…we said it).
We didn’t even touch on the other benefits of both variable and adjustable rate mortgages such as lower penalties and prepayment options.
With rates on the rise, the type of mortgage you qualify for comes down to what you can afford on a monthly basis.
So, if you want to discuss your options and figure out what that monthly payment looks like between a variable rate or adjustable rate mortgage, reach out to one of our awesome team members.