Let's talk variable rates.

A variable-rate mortgage is tied to your lender's prime rate, which moves when the Bank of Canada changes its overnight lending rate. Your mortgage rate is quoted as prime plus or minus a spread (e.g. prime minus 0.75%).

There are two common structures:

• Adjustable rate: your payment changes when prime moves. More interest means a higher payment; less interest means a lower payment.
• Variable rate with static payment: your payment stays the same, but the portion going to principal vs interest shifts. If rates rise significantly, your payment may eventually be interest-only.

Which structure you have matters. Make sure you know which one you're signing.

The Bank of Canada sets the overnight rate eight times per year. Commercial banks then adjust their prime rates, typically within a day or two. Fixed rates follow bond yields; variable rates follow the Bank of Canada. They're different mechanisms.

• When inflation is high, the Bank of Canada raises rates to slow spending.
• When the economy slows, rates are cut to encourage borrowing and growth.
• Rate decisions are announced on set dates each year, so there's no guessing when changes might come.

Variable rates reward borrowers when the Bank of Canada cuts rates. They create payment pressure when rates rise. Neither outcome is certain over a 5-year term.

• You have strong, stable income and can absorb higher payments if rates rise.
• You plan to break the mortgage early. Variable penalties are typically 3 months interest, versus the potentially large IRD penalty on a fixed mortgage.
• You believe rates will decline meaningfully over your term and want to benefit from each cut automatically.
• You want flexibility to pay down the mortgage quickly, since variable mortgages are often more prepayment-friendly.

• Your budget is already stretched and a payment increase would create real stress.
• You're on a tight qualification and rate movement could trigger a renewal problem.
• You value certainty and predictability over the potential savings.
• You have a fixed income and can't absorb rate volatility comfortably.

Neither fixed nor variable is universally better. The right answer depends on the spread between them at the time, your timeline, your financial flexibility, and how you sleep at night when rates move.

Most variable mortgages allow you to convert to a fixed rate at any time without a penalty. The catch: you lock in at whatever fixed rates are available on the day you convert, not the day you signed. In a rising rate environment, that conversion rate may be higher than when you started.

Converting makes sense when you want to stop the exposure and lock in certainty. It rarely makes sense in a panic. The decision is worth a conversation before you act.