Subtle differences in your mortgage term can mean big differences in payment amount and how long it takes you to pay off your mortgage. Are you aware that a variable rate mortgage (VRM) is different from an adjustable rate mortgage (ARM)?
While both are tied to Prime – the key lending rate set by the Bank of Canada – a variable rate mortgage (VRM) is one where the interest rates change with the market but the monthly payments are always the same.* When the Prime rate changes, more of your monthly payment goes towards interest and less towards principle. Some people like this feature because their monthly payment is predictable and they won’t have to worry if the interest rates rise, that the payments will suddenly increase. On a fixed income this can be appealing however keep in mind that each time the Prime rate rises, it will take you longer to pay off your mortgage.
An adjustable rate mortgage (ARM) is one where the monthly payments can change when the interest rate changes. So, if the Prime rate goes lower, then the monthly mortgage payments will be lower too. But if the Prime rate goes higher, then the monthly mortgage payments will also go higher.
For more information on what term is best for you, always discuss your options with a mortgage professional.
* A VRM will have a “trigger” rate where mortgage payment is no longer sufficient to maintain the new interest payment. At that time, you will be notified by your lender that you regular mortgage payment will be changing.