What is a Variable Interest Rate Mortgage?
Variable interest rate is a mortgage loan with an interest rate that changes during the term. The interest rate fluctuates with any changes in the market interest rate (typically the lenders prime interest rate). Usually the interest rates on a variable rate mortgage are often lower than the fixed interest rate offered at the time of signing the contract.
The advantage of a variable interest rate is that the interest rate can decline, resulting in the borrowers percentage on interest payments dropping. If the lenders prime rate goes down, more of your payment will go towards paying off your principal (refer to question #31). By the end of your term, it is possible that you could’ve paid off more of the principal than expected and less towards the interest accruing, which would therefore reduce the balance owing and shorten the time needed to pay off your mortgage.
Conversely, if the prime rate rises, the percentage on interest payments will also increase and your payment will go towards the interest accruing on your mortgage. This will also mean that a lengthier time might be needed to pay off your mortgage. As a result, you might’ve paid more interest on a variable fixed rate than if you had chosen a fixed interest rate.
Determining what interest rate suits you, depends on the market interest rates during the terms of your mortgage and your personal goals.