Mortgage Land Prosperity

Variable Rate Mortgage Strategy

Variable rate mortgages have become very popular over the last few years, and have been used by more and more mortgage borrowers.

A report by Dr. Milevski (York University, Toronto) reveals that between 1950 and 2000, variable rates were less expensive than the 5 by 5 strategy (five years fixed) 88% of the time.

Of course, a variable rate strategy incurs some risk, just by its nature of being variable. But the last half century has shown that it has been a risk well work taking.

Description

Interest rates on variable rate mortgages are based on the base rate of the large banks in Canada. The rate a borrower receives is a rabais over this base bank rate. Variable rate loans are always quoted as a base rate less a fixed percentage.

If the base rate, for instance, is 6.00%, and the bank quotes “base rate minus .90%”, this means that the variable rate loan will be 5.10% for the period that this base rate is in effect. If the base rate is lowered by the Bank of Canada, the loan rate is also lowered: a new base rate of 5.25% will mean a variable mortgage rate of 4.35% for that period. The Bank of Canada adjusts this rate 8 times per year. Note that this rate may be refixed at the same rate (no change), so the base rate does not necessarily have to change 8 times a year.

Advantages

- It has been shown by studies to be the best strategy, especially in stable or decreasing interest rate environments.
- This strategy permits borrowers to take advantage of periods of falling interest rates.
- Payments are normally lower.
- There is a lower penalty fee than with other strategies.
- Many lenders offer this loan option.

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