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Lately the press has drawn lots of attention to fixed rate mortgage rate increases and the changes to the qualifying rate for insured / high-ratio mortgages with terms of less than five years and variable rate mortgages. While these changes have been taking place many people have failed to notice that variable rate mortgages (VRM) have come down with many lenders making them very attractive for buyers or those refinancing a mortgage.

In case you are not familiar with variable rate mortgages, or are asking, “What is a variable rate mortgage” Here is some information that may help. Variable rate mortgages, as the name implies, is a mortgage with an interest rate that is not fixed over the term of the mortgage. The interest rate fluctuates or “varies” based on the Bank of Canada prime rate. Usually the prime rate is set monthly. The chartered banks and non-bank lenders add a slight premium or as we are currently seeing, apply a discount to the Prime Rate to establish their net variable mortgage rate. This is what most lenders use to price their various VRM products and Line of Credit products. When you select a variable rate mortgage, your premium or discount against the prime rate will be set for the term of the mortgage. Your net rate however will fluctuate up or down as the prime rate changes.

For example, my own mortgage came up for renewal several months ago and the best variable rate available at that time was Prime plus .4% (prime is currently 2.25%.) However, over the last few months many lenders have changed from charging a ‘premium’ on the prime rate for variables to offering a discount against prime. Many lenders are now offering variable rate mortgages from as low as Prime -.5%! This currently equals 1.75%!

On a $250K mortgage for example, the difference in monthly payment is about $110! Should I refinance?  With most variable rate mortgages the penalty to pay them out early or refinance them is simply three-month’s interest. There will also be legal fees and possibly an appraisal required to complete the process. The three month’s interest penalty in this example would be approximately $1550 plus legal fees etc of approximately $900 for a total of $2450 to refinance. With a savings of $110 per month the break even point to refinance is at 22 months! After 22 months the savings of $110 per is fully realized every month for the balance of the term. If the remaining term on this mortgage was 48 months the net savings would be $2860! For many, this amount of savings is enough to justify the time involved shuffling paper etc, for us to get them refinanced.

Variable mortgages are not for everyone. If fluctuations in your monthly mortgage payment (primarily on increases) would cause discomfort to your monthly budget, I would generally recommend a fixed rate mortgage. We would be happy to work with you to determine if a variable rate mortgage might be the right mortgage solution for you.

The above is an example only, E&OE / OAC. Contact us if you would like us to crunch the numbers for you to determine if refinancing your existing variable mortgage to the latest discounts might make sense.