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What is a Variable Rate Mortgage?
A variable rate mortgage is a type of home loan where the interest rate can change over time, based on market conditions and your lender's prime rate. With a variable rate mortgage, mortgage payments are set for the term, even though interest rates may fluctuate during that time. If interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of interest. Variable rate mortgages may be open or closed. A variable rate mortgage provides you with the flexibility to take advantage of falling interest rates and to convert to a fixed rate mortgage at any time.
Special Offer Rates for Variable Rate Mortgages
Below are some of our current special and posted rates for open and closed variable rate mortgages:
| Term | Rate | APR |
|---|---|---|
| 5-year closed term special offer2 | RBC Prime Rate % (3.950%) | % APR |
| 5-year open term posted rate1 | RBC Prime Rate + % | % APR |
| Today's Royal Bank of Canada prime rate | % |
Why Choose a Variable Rate Mortgage
Competitive Interest Rates
Variable rate mortgages typically offer a lower interest rate than fixed rate mortgages. This means:
- Lower initial regular payments to fit your budget
- Potential to save thousands in interest over your mortgage term
- Faster principal paydown if rates decline
Fixed Payments, Convertible Anytime
At RBC, your variable rate mortgage payment amount stays fixed for the term.
- If our prime rate goes down, more of your payment will go towards paying off your principal
- If our prime rate goes up, more of your payment will go towards interest costs.
Plus, convert to another term anytime and lock in when you're ready.
Flexible Payment Options
- Flexible schedules: Choose monthly, bi-weekly, weekly, or accelerated payments.
- Pay extra anytime: Double-up payments or prepay up to 10% of the original principal amount annually.
- Increase payments: Boost your regular payment by up to 10% per year.
- Skip-a-payment allows you to skip the equivalent of one month's regular payment amount when you need some budget flexibility.
Types of Variable Rate Mortgages
| Variable Rate Closed Mortgage | Variable Rate Open Mortgage | Variable Rate Convertible Mortgage | |
|---|---|---|---|
| Best for | Home buyers and owners seeking lowest rates with standard flexibility and long-term ownership plans. | Short-term situations or when expecting a large payment soon (sale, inheritance, bonus). | Anyone with a variable rate mortgage (it's included with all RBC variable mortgages). |
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Renewing Your Variable Rate Mortgage
Renewal time is a great opportunity to review your financial situation, and our goal is to make sure you choose the right mortgage options for your circumstances. When you're renewing a variable rate mortgage during a time of rising interest rates, there may be some additional options you'll want to consider to help reduce the impact of a higher payment and for managing your cash flow. Watch the video below for tips on renewing a variable rate mortgage.
Don't have YouTube access?
Renewing Your Variable Rate Mortgage
In this video we're going to talk about what happens to your mortgage payments when you renew your variable rate mortgage during a time when interest rates are rising. And, we'll cover some of the options you have for managing those payments.
First, let's talk about what happens when you renew your mortgage. Your mortgage comes up for renewal when your mortgage term ends. The term refers to how long your rate is set for. Amortization, which is another part of your mortgage, is the total length of time it takes to pay off your mortgage in full.
Say you originally chose a 5 year term and 25 year amortization. When your mortgage first comes up for renewal at the end of 5 years, there would be 20 years left on the amortization. At renewal, you will choose a new term at mortgage rates available at that time. This term, along with your new rate, mortgage balance and remaining amortization are all used to calculate your new payment amount. Now, if your mortgage is coming up for renewal in a rising interest rate environment, your new mortgage payment could be higher than what you pay now. How much higher will depend on a few factors but some of the key ones include: Your current mortgage type - whether it is fixed or variable. And your new interest rate.
If you have a variable rate mortgage, your interest rate may have already increased during your term. As a result, during at least some of the term, more of your payment would have been applied to cover your interest and less to paying down the principal. This means your principal balance is being paid down at a slower pace than it otherwise would have been had interest rates not changed. Consequently, your principal balance at the time of renewal will be higher than it would have been had interest rates stayed the same. Let's say your variable interest rate increased from 2% to 4% in year 4 and 5 of your mortgage, which means that more of your payment has gone to paying the interest versus paying down your principal over these years. At the time of renewal, the interest rate rises further to 5%. If you started with a $478,000 mortgage with 25 year amortization, your remaining principal after 5 years would be $17,348 higher than if the rates didn't change during the term. And, your monthly payment would increase from $2,026 to $2,758 upon renewal.
Nobody likes to see payments increase. Fortunately, there are a few steps you can take to help lower your payment before it's time to renew. You can make a lump sum payment; you can Double Up your payments; or you can increase your regular mortgage payment. Any of these actions can help reduce your principal balance and help lower the impact of a higher payment at renewal. In addition to these options, there may be other ways to manage your mortgage payments, depending on your personal circumstances. Some clients may be eligible to increase their amortization to help lower the payment amount.
We can help you take steps to manage your cash flow and your mortgage. Talk to an RBC advisor today!
Variable Rate Mortgages FAQs
You can't lock in a variable rate itself, since it moves with your lender's prime rate. However, most lenders let you convert a variable rate mortgage to a fixed rate mortgage at any time during your term.
This gives you the ability to lock in a fixed rate and secure more predictable payments if you are worried about rising interest rates.
Yes, but it may come with a prepayment charge.
Most lenders allow you to make lump-sum prepayments up to a certain percentage of your mortgage each year without prepayment charge. If you want to fully pay off a closed variable rate mortgage before the term ends, the prepayment charge is typically three months' interest.
To reduce or avoid prepayment charges, you could:
- Make prepayments within your allowed annual limit
- Switch to an open mortgage (which usually allows full repayment at any time, typically at a higher rate)
- Plan your payoff around the end of your term, when prepayment charges may no longer apply
Variable rate mortgages can either be open or closed. "Open" and "Closed" refer to how much flexibility you have to repay your mortgage early.
An open variable rate mortgage lets you make extra payments or pay off the full balance at any time without penalty. In exchange for that flexibility, the interest rate is typically higher.
A closed variable rate mortgage usually offers a lower interest rate, but limits how much you can prepay and may charge a penalty if you break the term early.
Many borrowers choose closed variable rate mortgages because of the lower interest cost. However, if you think you might sell your home soon or want maximum repayment flexibility, an open term might be worth considering.
With an RBC variable rate mortgage, mortgage payments are set for the term, even though interest rates may fluctuate during that time. If interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of interest.
Yes, variable rate mortgages can be portable. A port allows you to transfer your mortgage terms and conditions (including your interest rate, remaining term, and mortgage balance) to a new property when you sell your existing home.
However, portability depends on meeting certain conditions:
- Timing: You must have a firm purchase agreement for your new property and a firm sale agreement for your existing property
- Term requirements: Your mortgage must have a minimum remaining term (generally at least 2 months)
- Property requirements: The port must be to a single property only; it cannot be divided across multiple properties
Common port scenarios include:
- Purchase prior to sale: Your new property closes before your existing property sells (closing dates must be within 120 days)
- Delayed port: Your existing property closes before your new property purchase (you have 120 days to complete the port)
Note: Specific conditions may apply if you need to increase your mortgage amount when porting.
If portability is important to you, review your specific mortgage agreement or contact your RBC mortgage specialist to confirm the exact terms and conditions that apply to your mortgage.
HomeProtector Mortgage Insurance
It allows you to not only safeguard yourself and your family's lifestyle, but also your assets and net worth.
Mortgage funds must be advanced within 120 days of date of application in order to qualify for the Special Offer rate. Offer may be changed, withdrawn or extended at any time, without notice.
Personal lending products and residential mortgages are offered by Royal Bank of Canada and are subject to its standard lending criteria. Some conditions apply. Offer may be changed, withdrawn or extended at any time, without notice.