Confused About "Variable" Rate Mortgages?

(August 24, 2011 )

This is something that many people have questions about.  When you have a variable rate mortgage, the interest rate you pay can change from time to time.  How does it change and why?  Well there are 2 parts to a variable rate:

The rate you pay is equal to Prime Rate + Bank Spread

Prime Rate is determined by the government and it is the same for all of the big Canadian Banks.  The rate can only be changed when the Bank of Canada holds a meeting and announces an increase or decrease (usually by increments of 0.25%).  There are a total of 8 meetings scheduled in 2011.

Bank Spread is any additional interest rate the bank is charging over the Prime Rate.  It may be different from bank to bank, and customers should negotiate this spread. 

Since the Prime Rate can change throughout the year, your mortgage rate will increase or decrease by the same amount.  However, the Bank Spread will stay the same until the end of the term, where you will have to renegotiate the mortgage rate again.