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Understanding the Difference Between a Variable Mortgage and an Adjustable Variable Mortgage
October 24, 2024 | Posted by: Nicholas Pratile
When shopping for a mortgage, you may come across terms like 'variable mortgage' and 'adjustable variable mortgage.' While they may sound similar, these two options come with distinct features that can impact your monthly payments and long-term costs. Knowing the difference between them will help you make the best decision for your financial future.
What is a Variable Mortgage?
A variable-rate mortgage (VRM) offers an interest rate that fluctuates with the lender’s prime rate, which is tied to the Bank of Canada's benchmark rate. While your monthly payment amount remains constant throughout the mortgage term, the portion of your payment that goes towards the principal versus the interest will vary as interest rates change.
In a rising interest rate environment, a larger portion of your payment will be applied toward interest, and less will go toward reducing the principal. On the other hand, if rates drop, more of your payment will go toward the principal, helping you pay off your mortgage faster.
Key Benefits of a Variable Mortgage:
- Payment Consistency: Your monthly payment amount stays the same, providing predictability for your budget.
- Interest Savings: If rates decrease, more of your payment goes toward the principal, which can save you money over time.
- Downside: If interest rates increase, you may end up paying more in interest over the life of your loan, but your payment will not increase.
What is an Adjustable Variable Mortgage?
An adjustable variable-rate mortgage (AVRM), also known as an adjustable-rate mortgage (ARM), is another type of mortgage where the interest rate fluctuates with the lender’s prime rate. The difference here is that your monthly payment adjusts along with interest rate changes.
In an AVRM, if interest rates rise, your monthly payments will increase, and if rates fall, your payments will decrease. While this type of mortgage offers the potential for immediate savings if rates go down, it also exposes you to higher payments if rates increase.
Key Benefits of an Adjustable Variable Mortgage:
- Immediate Rate Response: When rates drop, you immediately benefit from lower payments.
- Lower Initial Payments: Adjustable variable mortgages often start with lower interest rates, meaning you may begin with smaller payments compared to fixed-rate mortgages.
- Downside: If rates rise significantly, you could face much higher monthly payments, making it harder to manage your cash flow.
How to Choose Between Variable and Adjustable Variable Mortgages
Both variable and adjustable variable mortgages come with their own risks and rewards, so the right choice depends on your financial situation, risk tolerance, and future rate expectations.
- Consider a Variable Mortgage if:
You prefer consistent payments and can handle potential fluctuations in how much of your payment goes toward interest versus principal. - Consider an Adjustable Variable Mortgage if:
You’re comfortable with the possibility of fluctuating monthly payments and believe that interest rates will decrease, allowing you to benefit from immediate savings.
Get Expert Mortgage Advice
Deciding between a variable and an adjustable variable mortgage can be tricky, but I’m here to help! As someone who has personally gone through the ups and downs of real estate investment, I can guide you toward the best mortgage solution for your unique needs.
Contact me today for personalized advice and let’s find the mortgage that works best for your financial goals.
Nicholas Pratile, Mortgage Broker – Dominion Lending Centres
Phone: 416-712-5621
Email: info@mortgageswithnicholas.com
Website: mortgageswithnicholas.com
Facebook: Mortgages with Nicholas
Instagram: @mortgageswithnicholas
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