Not All Variable Rates Are Created Equal

General Carola Singer 3 Nov

With Prime Rate being incredibly low variable mortgage rates are quite popular these days. Reason being that the discounts are desirable and this product gives a borrower a lot of flexibility in regard of payout penalties as well as using fluctuations in the rate to pay the mortgage off faster. 

One would think that all variable rates are created equal but unfortunately there is more to them than meets the eye. Different lenders have different criteria for their variable rates and here are some key factors:

Factor 1: Recently you may have heard that one of the “Big” banks has increased their prime rate from 2.70% to 2.85% even though Bank of Canada hasn’t. How does that compare to the other banks who haven’t done that?

Your interest cost has just gone up $12.50 per $100,000.00 outstanding.

If their variable rate discount is at prime -0.50% the same as bank Bs variable rate, bank B is actually a lower rate, if their prime rate is lower.

By the way, if you have a home equity line of credit with that bank, that money just got more expensive as well. 

Factor 2: Some lenders will compound the interest on variable interest rates monthly versus semi-annually. Again you could have two lenders showing the same rate but if one compounds monthly, your interest cost will be higher.

Factor 3: Typically the payout penalty on variable rate terms is three months interest. There are a few lenders that have a staggered pay-out penalty depending how long you are in the term. This may not be a big deal but would be good to know depending on what your plans are in the future. 

A variable rate is a great product and term and statiscally people have always done better with them. Let us, the experienced mortgage brokers, take the guess work out for you and streamline it to your needs. 

If you have a variable rate and are not sure if any of the above factors apply to you also talk to an experienced mortgage broker