You can Save Money with a Variable Rate
Linda Wickstrom –
In this month’s column I want to clarify the difference between a
variable rate and a fixed rate, and explain how a variable rate can
work for you. Before I go into that I also want to share some exciting
news that will make home buying easier here in the lower mainland for
sure, and in other parts of Canada.
CMHC and GE have announced they are allowing 100 per cent financing for
mortgages, the borrower has to be able to prove 1.5 per cent of
purchase price from their own resources, but they can actually borrow
the down payment now, which was never permitted before. The Borrower
has to be able to qualify for the debt load of course. This opens up
the door to those that perhaps have not been able to save up a down
payment for whatever reason, but have an excellent credit history and a
Now on to the meat of the column: everybody has heard of Variable Rate
Mortgages (VRM). But very few people understand what they are, how they
work and so people tend to shy away from one of the best products
available to help them pay down their mortgage faster. The greatest
difference between VRMs and fixed rate mortgages is how the rates are
set. VRM rates are set based on the Bank of Canada rate. The chartered
banks add a slight premium to the Bank Rate to establish Prime Rate.
This is what most lenders use to price their various VRM products. In
our system the Bank of Canada uses its bank rate to control inflation
in the economy. When little or no inflation is present as is the case
right now, this rate tends to be set at very low levels and is
The fixed rates, on the other hand are set based on the yield in the
bond market. The bond yields are very volatile and tend to fluctuate,
often due to political and economic conditions. This volatility makes
it impossible to gauge what fixed rates will do, even in the short term.
Here’s how the smart consumer wins by taking a VRM over a fixed rate
product. Right now you can get a discounted VRM rate, around 3.9 per
Conversely the discounted rate for a five-year mortgage is around six
per cent. The smart consumer takes the VRM with the low rate but makes
the payments as if the mortgage is at the higher fixed rate. The
difference between the minimum required payment, (calculated at 3.9 per
cent) and the payment actually being made(calculated at six per cent)
is additional monies that are going directly to the principal. Even if
the Prime rate starts to increase, it will probably take a long time
before it reaches a level close to the fixed rate currently available.
The VRM also has the option to lock in at any time to a fixed rate. But
don’t be too hasty in doing just that. A quick analysis shows, that if
you took out a five-year VRM anytime between January 1990 and now, set
your payments at the higher rate, your outstanding mortgage balance
would be lower than if you took a five-year, fixed rate mortgage.
Hope you have enjoyed this months tidbits, and please go to my website (www.mortgagemaster.ca
explore there is even a mortgage calculator, you can test the waters
and see what you qualify for. See you next issue!