Why Would You Choose A Variable Mortgage Rate?

In one of our previous post, we outlined the pros and cons of fixed mortgage rates. Today, we will look deeper into the variable mortgage rates and its variation. You should know upfront that there are two types of variable mortgage rates: The home equity line of credit (HELOC) and the conventional variable mortgage rate. Today, we will discuss of the conventional one and another post will cover the HELOC.

What does a variable mortgage rate means?

A variable mortgage rate is a floating interest rate. It is usually related to the Prime Rate (interest rate determined by banks according to the Central Bank of your Country. Ex: Fed in the US and Bank of Canada in Canada).

It is usually shown as Prime plus a premium or Prime minus a few points for really good clients (high net worth, amount of business with the bank, credit score).

You will usually have a term related to your variable interest rate. During this term, you might have the possibility to trade your variable rate for a fixed rate. It is important to remember that you won’t lock your present rate. You will only have the option to negotiate a new fixed rate according to what is offer on the market at that time.

In order to modify your mortgage interest rate, banks will usually request that you keep at least the same term and same amount (it can obviously be higher) in order to not pay any penalty fees.

Who is it for?

Historically, variable rates are always beating fixed mortgage rate over a 20, 25 years amortization period. During your term, you will probably pay more than if you would have locked a fixed mortgage for a few month of even a year. But overall, you will always be a winner with variable rates.

On the other side, variable mortgage rate also means variable mortgage payments. Some people just can’t afford a mortgage payment increase by $100 a month. This is why they choose the fixed mortgage interest rate.

Some other can’t live with the idea of a payment fluctuation even though they can afford it. The best solution in any personal finance aspect is the solution that let you sleep at night!

On the other hand, someone how has a well balanced budget and free cash flow, should definitely go with a variable rate in order to save more interest charges.

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