What is a Closed Variable Rate Mortgage?

A variable rate mortgage is a mortgage that bears an interest rate that floats with the prime rate set by the Bank of Canada. If mortgage interest rates go down, so does the mortgage rate of a client who has a variable rate mortgage. Likewise if mortgage interest rates go up, so does the mortgage rate of a client who has a variable rate mortgage.

In the past several years mortgage interest rates in Canada have been at historic lows and so many Canadian homeowners continue to maintain variable rate mortgages.

A closed variable rate mortgage is a mortgage that offers a variable rate but is also closed. Banks generally offer closed variable rate mortgages over 1, 3 or 5 years.

Choosing a closed variable rate mortgage means that you will be guaranteed that your mortgage interest rate discount from the banks' prime rate (if you have negotiated a discounted rate) will remain the same throughout the term of your mortgage. The same is true of you don’t have a discounted interest rate and you are paying at prime or even one or two percent above prime.

Some variable rate mortgages are re-calculated immediately while others are recalculated monthly or even every three months. A closed variable rate mortgage (just like an open variable rate mortgage) could mean that your monthly payment would be fixed throughout the term. This would mean that if the Bank of Canada's interest rate changed (up or down) the amount of your payment that is allocated to principal and interest would be adjusted accordingly. In other cases and if you select a changing payment schedule, your actual mortgage payments would increase or decrease according to whether the Bank of Canada's lending rate has been increased or decreased.

All variable rate mortgages enable you to lock in anytime to a fixed mortgage interest rate. Generally, you can amortize your mortgage payments up to 30 years. You can select a monthly repayment schedule that is monthly, semimonthly, weekly or biweekly.

So how can you determine if a closed variable rate mortgage is right for you? Typically you would select a closed variable rate mortgage if you anticipate that the prime lending rate is going to go down. You have to be sure that you can accept the risk that if the prime lending rate goes up, so will your mortgages interest rate.

Primarily the world economy will dictate what happens with national lending rates. If you are going to choose a variable rate mortgage product pay attention to the news. Signs that the world's economy is improving will generally result in interest rates going up. Alternatively, signs of a weakening world economy will generally signal that mortgage interest rates will stay the same or even go up.

Staying informed will be the best way to forecast what is going to happen with your mortgage, otherwise a fixed rate mortgage product may be better for you.