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Variable rates can present a catch-22. On the one hand, variables are almost always cheaper than most fixed mortgages. And they also let you capitalize on falling interest rates.
On the other hand, when rates start climbing, so do your interest costs.
That risk keeps a lot of people from even thinking about floating their mortgage rate. But it doesn’t have to.
You can still go variable and protect your budget from unexpected strain. The way to do that is with a fixed-payment variable.
With a fixed payment, when prime rate rises you simply pay more interest and less principal, and vice versa when prime falls. But your actual payment stays the same (unless rates soar so much that you’re not even covering the minimum interest due, which is rare).
That’s opposed to an adjustable rate mortgage (ARM) where both your payment and interest cost vary as prime rate fluctuates.
Who’s Got ’em?
Not all lenders have fixed payments on their floating-rate mortgages. According to our research, just 50% of mainstream lenders offer this option.
Here’s a partial list of lenders who do and don’t…
| Lenders With Fixed-Payment Variables |
| Alterna Savings and Credit Union |
| B2B Bank |
| BMO Bank of Montreal |
| CIBC |
| Coast Capital Savings Credit Union |
| Desjardins |
| DUCA Financial Services Credit Union Ltd. |
| First Ontario Credit Union |
| HSBC Bank of Canada |
| Investors Group |
| Manulife Bank of Canada |
| Radius Financial |
| RBC Royal Bank |
| Simplii Financial |
| TD Canada Trust |
| Vancity Credit Union |
| Lenders With Some Fixed-Payment Variables |
| Scotiabank |
| Lenders Without Fixed-Payment Variables |
| CMLS |
| Equitable Bank |
| First National |
| Home Trust |
| ICICI Bank Canada |
| Industrial Alliance |
| Lendwise/Merix |
| Marathon Mortgage |
| MCAP |
| Meridian Credit Union |
| motusbank |
| National Bank of Canada |
| RMG Mortgages |
| RFA Mortgages |
| Tangerine |
Oftentimes you’ll find adjustable mortgage rates slightly below the best variable rates. But ARMs require you to incur all the payment risk.
One Workaround
If you find a cheaper adjustable rate mortgage and want to shelter yourself from prime rate changes, consider increasing your payment from the get-go.
In other words, make use of your payment increase or lump-sum prepayment option to set the payments equal to a 5-year fixed rate.
Here’s an example.
Suppose you have a 2.20% adjustable rate and pay $1,300 monthly. You’re worried about rising payments, but prefer to keep floating your rate.
No problem.
All you need to do is pay your mortgage as if it were a 5-year fixed. Average 5-year fixed rates are roughly 3.39% right now. At 3.39%, you’re looking at a $1,480 monthly payment. If you paid that amount on your adjustable rate mortgage, it would take at least five quarter-point Bank of Canada rate hikes before you ever had to pay more. And five may be a lot for this overleveraged economy to handle.
This strategy gives you a pretty good shock absorber for future rate hikes, and a lower rate to boot.
2 Comments
Is this allowed if the mortgage is default insured (i.e on a 5 % down mortgage). If the payment stays locked and the rate increases 60 days later, the amortization would effectively increase beyond the 25 years on the mortgage???
Yes, fixed payment variables are allowed with default insurance.
If rates go up, generally what happens is the amortization is extended until maturity. Then the payments are reset at a higher level (if needed) to keep the original amortization on track.