Variable-rate mortgages are typically set at a pre-determined percentage above the prime rate and then fluctuate up and down with prime. The interest rate is a little lower than that of a fixed-rate mortgage, which offers the peace of mind of having a locked-in rate for the duration of the mortgage term.
In an economy where interest rates are expected to stay the same or decline, variable-rate mortgages are usually the more attractive option. However, when faced with rising interest rates, locking in at a fixed rate can be a good way to reduce the risk of unexpected mortgage payment increases down the road.
Despite the fact that the Bank of Canada has held its overnight rate steady since September of 2010, more and more Canadians are opting for a fixed-rate mortgage.
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