Glossary
Variable-Rate Mortgage
A mortgage whose interest rate rises and falls with the lender's prime rate during the term instead of staying fixed..
A variable-rate mortgage is a mortgage whose interest rate moves up and down with the lender's prime rate during the term, rather than staying fixed for the whole term. When the Bank of Canada changes its policy interest rate, lenders typically adjust prime, and the rate on a variable mortgage follows, often within a day or two.
How the rate is set
Lenders price variable mortgages as a spread to prime, such as prime minus a set percentage. That spread is negotiated at approval and normally stays constant for the term, so what changes is prime itself. Two structures exist in Canada: an adjustable-rate variable mortgage, where the payment changes as prime moves, and a static-rate variable mortgage, where the payment stays level and the mix of interest versus principal shifts instead. The distinction matters, because it decides whether your monthly outlay or your balance is affected first.
Why it matters
Qualification rules are part of the picture. Under OSFI Guideline B-20 and the federal mortgage stress test, borrowers generally must qualify at a higher rate than the contract rate — either the contract rate plus a buffer, or a floor rate, whichever is greater. A variable-rate borrower may therefore need to show they can carry payments well above today's rate. In exchange, variable rates have often been lower than fixed rates and tend to fall quickly when the Bank of Canada cuts. The trade-off is payment shock if rates climb.
Comparing the two
- Fixed rate: rate and payment are locked for the term; predictable, but you do not benefit from rate cuts.
- Variable rate: tracks prime; often cheaper over some periods, but the payment or the amortization can shift.
On a static-rate variable mortgage, if prime rises enough that the level payment no longer covers the interest due, the shortfall can be added to the balance, a risk sometimes described as negative amortization. Lenders usually trigger a payment increase before that point, and the specific trigger is set in the mortgage contract.
Breaking a variable-rate mortgage mid-term usually costs three months' interest rather than the interest rate differential that many fixed mortgages use, though not every lender calculates it the same way. Confirm the exact terms in your commitment, and see our guide to fixed vs variable mortgage rates.
Frequently asked questions
Is a variable-rate mortgage the same as an adjustable-rate mortgage?
In Canada, variable rate is the broader category. An adjustable-rate variable mortgage changes your payment when prime moves, while a static-rate variable mortgage keeps the payment level and shifts how much goes to interest versus principal. Lenders label these differently, so confirm which structure you are being offered before signing.
Do variable-rate mortgage payments always change when prime changes?
No. With an adjustable-rate variable mortgage the payment typically moves with prime. With a static-rate version the payment usually stays the same while the interest and principal split changes, and the lender may adjust the payment or amortization only if the rate moves far enough. The contract sets the trigger.
Is a variable rate always cheaper than a fixed rate?
Not always. Variable rates have often started lower than fixed rates and fall quickly when the Bank of Canada cuts, but they also rise when the policy rate rises. Whether variable costs less over your term depends on where rates go and how long you keep the mortgage, so compare both on the same amortization.
Sources
Related terms
- Fixed-Rate Mortgage — A fixed-rate mortgage keeps the same interest rate and the same scheduled payment for the entire mortgage term, so each payment is known in advance.
- Adjustable-Rate Variable Mortgage — An adjustable-rate variable mortgage ties the interest rate to a lender's prime rate, so the periodic payment rises or falls as prime moves.
- Static-Rate Variable Mortgage — A variable-rate mortgage whose payment stays fixed while the interest and principal split shifts as the lender's prime rate moves.
- Prime Rate — The prime rate is the interest rate Canadian banks charge their most creditworthy borrowers, and it is the benchmark used to price variable-rate mortgages and lines of credit.
- Mortgage Stress Test — The federal mortgage stress test is a qualification rule that makes lenders check whether you could afford your mortgage if rates were higher than your contract rate.