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Variable Rate Mortgage

Explore how variable rate mortgages work in Canada, their benefits and risks, and how rate changes affect your home loan payments.

Variable Rate Mortgage

May 22, 2025


What is a Variable Rate Mortgage?

A variable rate mortgage is a home loan with an interest rate that fluctuates based on the lender’s prime rate or a benchmark rate like the Bank of Canada’s overnight rate.

Why Do Variable Rate Mortgages Matter in Real Estate

In Canada, variable rate mortgages typically offer lower initial interest rates than fixed-rate options, but the rate can change over the life of the mortgage, affecting monthly payments.


Two common types:
  • Adjustable-rate: Monthly payment changes as the rate changes
  • Fixed-payment variable: Payment stays the same, but interest/principal ratio shifts

Pros:
  • Lower initial interest rate
  • Potential savings if rates stay low

Cons:
  • Risk of rising interest rates
  • Harder to budget long-term


Buyers choosing a variable rate mortgage must be comfortable with uncertainty and have financial flexibility to absorb rate increases.


Understanding variable mortgages is key to selecting the right product based on risk tolerance, economic outlook, and long-term financial goals.

Example of a Variable Rate Mortgage in Action

A homeowner chooses a variable rate mortgage starting at 4.25%. When the Bank of Canada raises rates, their interest rate increases to 5.00%, and their payments rise accordingly.

Key Takeaways

  • Interest rate changes with market conditions.
  • Lower initial cost, but higher risk.
  • Two types: adjustable and fixed-payment.
  • Influenced by Bank of Canada decisions.
  • Requires comfort with rate fluctuations.

Related Terms

  • Fixed Rate Mortgage
  • Prime Rate
  • Mortgage Term
  • Amortization
  • Refinancing

Additional Terms

Recourse Loan

A recourse loan is a type of loan where the lender can pursue the borrower’s personal assets, beyond the collateral, in the event of default.. more

Pari Passu

A pari passu clause is a contractual provision ensuring that multiple creditors share equally in repayment priority from the borrower’s assets.. more

Non-Recourse Loan

A non-recourse loan is a type of loan where the lender’s only remedy in case of default is to seize the collateral property; the borrower is not. more

Net Operating Income

Net operating income (NOI) is the total income generated by a property after operating expenses are deducted but before taxes and financing costs.. more

Mechanic's Lien

A mechanic’s lien is a legal claim by a contractor, subcontractor, or supplier for unpaid work or materials provided for a property.. more

Lis Pendens

Lis pendens is a legal notice filed in the land registry indicating that a property is subject to ongoing litigation that may affect its title.. more

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