Picture opening your mortgage statement month to month and seeing a slightly different payment every time. That’s the reality for many homeowners who chose a mortgage that moves with the market, also called an adjustable rate mortgage. It can feel confusing at first, but our team at Mortgage Connection is here to help make sense of it all.
In Canada, an adjustable-rate mortgage is a type of variable mortgage where both your interest rate and monthly payment can change as your lender’s prime rate changes. That means your cost of borrowing shifts as the market shifts, which can work for or against your budget depending on where rates go.
How an Adjustable Rate Mortgage Works
With an adjustable rate mortgage, your rate isn’t locked in place. It follows the prime rate, which is the benchmark lenders use to set borrowing costs. When prime goes up, your rate climbs. When prime drops, your rate may follow.
In practice, that means that your mortgage payment will look slightly different as it follows the prime rate. One month it may be a little lower than you planned for, but a few months later, it may be higher.
Adjustable Rate vs. Variable Rate: Know the Difference
People often mix up an adjustable rate mortgage with a variable rate mortgage, but they are different things, and therefore behave differently. Here is what sets them apart:
- Adjustable rate payments move up or down with the prime rate.
- Some variable-rate mortgages keep payments fixed while the amount going toward interest and principal changes. In some cases, the amortization period can also change.
- Trigger rate risk means that with fixed payments, rising rates can push you to a point where your payment no longer covers the interest of the loan.
Why Payment Type Matters
The payment type you pick can shape how you feel at renewal. With some variable-rate mortgages, rising rates can mean a larger portion of your payment goes toward interest instead of paying down your principal.
That can lead to payment shock when you renew, since your payment may jump to catch up. On top of that, your amortization can stretch longer than planned, which means you carry the debt for more years than you expected.
Adjustable Rate Mortgage vs. Fixed Rate Mortgage
A fixed-rate mortgage locks in your interest rate for your mortgage term, which usually means predictable payments during that period. You always know the number, which can help make planning a bit simpler.
An adjustable rate mortgage may start with a lower rate depending on market conditions. That lower start can free up cash early on, though it comes with less certainty down the road.
There’s another point worth noting. If you need to break your mortgage early, the penalty on an adjustable rate mortgage tends to be smaller than the penalty on a fixed one. That flexibility can matter if your plans shift.
Pros and Cons of an Adjustable Rate Mortgage
The Upsides
An adjustable rate mortgage can offer real advantages depending on your situation. That can include:
- A lower starting rate compared to many fixed options.
- Extra room in your budget when rates drop.
- A good fit for short-term plans where you won’t hold the mortgage for long.
The Downsides
No option is perfect, so an adjustable rate mortgage does come with trade-offs you’ll want to consider. That can include:
- Your payments may climb when rates rise.
- A shifting payment can make it harder to plan a steady budget.
- More moving parts to track over the life of the loan.
When an Adjustable Rate Mortgage Makes Sense for You
An adjustable rate mortgage isn’t right for everyone, but it can fit certain situations well. Before deciding, you need to consider your comfort level, long-term plans, financial situation, and talk to a mortgage broker about what may be the right decision for your specific situation.
It might be worth talking to your mortgage broker about an adjustable rate mortgage if:
- You plan to own for a short time or sell before long.
- You have enough flexibility in your budget to handle potential payment increases.
- You feel comfortable with payments that can change.
How Calgary Mortgage Brokers Help You Decide
Sorting through your options gets easier with someone in your corner. Mortgage brokers in Calgary can compare products across many lenders, so you see choices you might miss on your own.
They can also run the numbers for your specific budget. That way, you get a clear picture of how a rising or falling rate could affect your monthly payment before you commit.
Contact Us
Choosing between an adjustable and fixed rate often comes down to your goals, your timeline, and how you feel about uncertainty and risk. Our team at Mortgage Connection can walk you through the details with clarity, so you feel informed every step of the way. Reach out today to talk through your options and find the mortgage that fits your life.
Would you rather have predictable payments, or more flexibility if rates change?
