The differences between variable rate mortgages and adjustable rate mortgages
Adjustable Rate Mortgages Versus Variable Rate Mortgages
There are two types of mortgages that are linked to the prime rate, Adjustable and Variable rate mortgages.
A particular lender will offer either a variable or adjustable but not both. It is important to know which one you are
receiving as it can impact your payment and amortization.
Adjustable Rate (ARM)
Adjustable rate mortgage payments will change as the prime rate changes maintaining the original amortization
period. When your payment changes your lender will communicate the amount of your new payment to you.
Variable Rate Mortgage (VIRM)
The payments on variable rate mortgages remain stable throughout the term of the contract. If prime decreases,
more of your payment is attributed to principal reducing your amortization. If prime increases, more of your payment is allocated to interest which will extend your amortization.
Trigger Rate
The trigger rate is the rate at which you are no longer covering your interest costs. Your variable rate payment
may need to be adjusted should prime exceed your trigger rate. This rate is often found on your legal documents.
How the Rate is Determined
Banks and lenders set their own prime rate based on the Bank of Canada rate. There are 8 scheduled
meetings per year to determine whether the rate will be maintained or adjusted. If your payment is affected
you will be notified by your lender.
Can I Switch to a Fixed Rate?
If at any time throughout the term you decide you want to lock into a fixed rate, this option is available. Depending
on your particular lender you may be able to complete the remaining term or convert to a mortgage product with new terms. Penalties and conditions may apply.
If you are unsure what type of mortgage is best for you, or when to consider locking into
a fixed rate, contact your mortgage broker to discuss.