What are Variable Fee Mortgages?

One of the biggest decisions you’ll make in the process of buying an investment property, besides choosing which specific property to buy, is the type of mortgage you’ll use to buy it. There are a number of options when it comes to finding the mortgage that suits your financial situation the best. In some cases, that will be a variable rate mortgage. This page contains information about when a variable rate mortgage is going to be the ideal choice, when it is not the best option, and how you can determine where your unique financial situation fits into this.

Is it better to get a fixed or variable rate mortgage?

This is a personal question and the answer will depend on your own financial situation, your tolerance for risk if you’re willing to pay a premium for stability, and other such considerations.

With a fixed-rate mortgage, your interest rate stays the same each month and your payments are the same throughout the term of your mortgage. 

A fixed-rate mortgage is the better choice when interest rates are rising. Locking in at a low rate will save you money even if it means paying a slightly higher rate at the time of signing. If rates continue to rise, then you’ll keep paying a lower rate and you’ll end up ahead.

A variable rate mortgage is beneficial when mortgage rates are falling because you’ll be able to take advantage of falling rates. If you were locked in at a certain rate, and then rates continued to decline, then you would not benefit from the new and lower rates. This is where a variable rate mortgage is the best choice. However, we can’t always predict whether rates are going to rise or fall, which is the million-dollar question here. This is where each individual has to consider their own tolerance for risk.

Some would argue that a variable rate mortgage means you’re speculating on the movements of interest rates in the future, but that’s the case regardless of which type of mortgage you choose. Either way, you’re betting on rates moving higher, going lower, or staying relatively the same. If you expect rates to stay the same, then a variable rate mortgage is still a good choice because they often cost a bit less than a fixed-rate one.

You pay a premium for a fixed-rate mortgage on top of whatever the current prime rate of borrowing is—so with a variable rate, you’re basically banking on rates moving low enough to make up for that. 

What is a good variable mortgage rate?

Mortgage rates can change fairly often depending on the economy, the prime interest rate, and how analysts predict things to move in the future. As such, finding a good variable mortgage rate is relative to the current conditions of the economy and the lending markets.

We can’t pick a single rate and say “this is always going to be a good rate” because finding the best rate will come down to shopping around, seeing what’s available, and choosing the one that suits you best. You can go to your bank to inquire about their current rates or you can talk to a mortgage broker who will shop around to multiple lenders to find you the best current variable mortgage rates. Using a broker can be beneficial because they’re able to shop for wholesale rates. When you walk into a bank on your own, you’ll be presented with consumer rates. Essentially, a mortgage broker has more buying power than you have as an individual. The broker does earn a commission, but it’s usually only a portion of the total money they can save for you, so you can still come out ahead.

A mortgage broker—or your own bank, for that matter—will be able to show you the differences in rates between variable rate mortgages and fixed-rate mortgages. This is in addition to the various terms and conditions that can be applied to either of them to better craft a mortgage that suits your needs.

Is a variable mortgage the best?

Another consideration to think about is how long you plan to stay with your investment property. If you are planning on selling your property before you’ve paid off your mortgage or before you’ve made it to the home-stretch in terms of your payments, then a variable rate could be a good idea. This is especially if the current rates are on the lower-end or in the process of declining.

The reasoning behind this is that a variable rate mortgage will give you a slight advantage over a fixed-rate one at the current moment. Additionally, if you aren’t planning to live there for the entire length of time that it takes to pay off the mortgage, then you are limiting your exposure to interest rate fluctuations while taking advantage of the best rate in the meantime.

On the other hand, if you are planning on staying in one place for decades, then it’s not a bad idea to lock in with a fixed-rate mortgage and just completely ignore the majority of interest rate ups and downs over the years. You’ll have opportunities to refinance and you can see what makes the most sense at any given time.

There are scenarios, as outlined throughout this page, where a variable mortgage is the best option. There are other times where a fixed-rate mortgage makes the most sense. Beyond looking at your own situation, your tolerance for risk, and how you see the markets moving overtime, at a certain point, you have to acknowledge that you can’t predict the future. Therefore, you need to find the option that you’re most comfortable with while taking sustainability into account. Can you afford to make your payments if interest rates rise? Or, are you willing to end up with a mortgage that stretches on longer than originally expected? If so, then you may want to take a chance on a variable rate. On the other hand, you’re also taking a chance by locking in with a fixed-rate mortgage.

What are the types of variable rate mortgages?

With a variable rate mortgage, you can choose between different types of payment plans. There are fixed payments where you end up paying the same amount each month even with a variable rate. Additionally, it’s the total length in time of the mortgage that gets adjusted as interest rates change. There are also floating payments where your monthly payments can go up or down depending on the movements of the interest rates.

A variable rate mortgage on a fixed payment plan is a good way to budget if you don’t want to risk ending up with higher mortgage payments, but you still want to take advantage of the anticipation that rates could decline over time.

What are the next steps?

There are many different variable rate mortgage loans to choose from—whether you’re dealing with a bank or with a broker. Five years is a common mortgage term, but you may decide on something different if it suits your situation better. Fixed-rates mortgages have their advantages for people who are staying in place for a long time or want to know exactly how much they’ll pay each month and are willing to pay a premium for that privilege. However, variable rates can also come with payment terms that will ensure your monthly payments stay the same.

Variable, fixed, floating, or whatever else you choose, time without a mortgage means more time renting property. More time renting property means more time without building equity.

Remember that variable rates are based on the rates set by the Bank of Canada for Canadians or the Federal Reserve for Americans.