Variable-rate mortgages, explained plainly
Your rate moves with your lender's prime rate. Here's exactly how that works, what a 'trigger rate' actually is, and when variable makes more sense than fixed.
How it works
Your rate tracks the lender's prime rate
Variable rates are quoted as prime minus or plus a percentage (e.g., prime − 0.5%). Prime moves when the Bank of Canada changes its overnight rate, so your rate can change several times a year.
Two flavours: adjustable payment vs. static payment
Some variable mortgages (adjustable-rate, or ARM-style) change your actual payment amount when prime moves. Others keep your payment the same and instead shift how much of it goes to principal vs. interest — those are the ones with a 'trigger rate' to watch for.
The trigger rate matters on static-payment variables
If your payment is fixed but your rate rises enough that it no longer covers the interest portion, you hit your 'trigger rate.' At that point your lender will typically require a higher payment, a lump-sum payment, or will start adding unpaid interest to your balance.
Pros and cons
Pros
- Breaking the mortgage early is usually cheaper — the penalty is a flat 3 months' interest, not the Interest Rate Differential that fixed mortgages use
- Historically has come out ahead of fixed over the long run in many periods
- More flexibility if you expect to move, refinance, or renew sooner than your full term
- You benefit immediately if the Bank of Canada cuts rates
Cons
- Payments (or the interest/principal split) can change with little notice
- Exposure to rate increases — a rising-rate environment can be genuinely stressful
- Static-payment variables carry trigger-rate risk if rates climb enough
- Harder to budget around precisely if your payment itself is the variable part
Who it's best for
- Buyers comfortable with some payment or rate uncertainty in exchange for flexibility
- Anyone who expects to break, refinance, or move before their term is up — the lower penalty matters most here
- Borrowers who can absorb a rate increase without real financial strain
- Those who want to benefit immediately if rates fall
Common questions
On a static-payment variable mortgage, your trigger rate is the point where your fixed payment no longer covers even the interest owed for that period. When you hit it, your lender will typically require you to increase your payment, make a lump-sum payment, or start capitalizing unpaid interest onto your balance.