Glossary
Adjustable-Rate Variable Mortgage
An adjustable-rate variable mortgage ties the interest rate to a lender's prime rate, so the periodic payment rises or falls as prime moves..
An adjustable-rate variable mortgage is a variable-rate mortgage whose payment amount changes whenever the lender's prime rate moves. The interest rate itself floats with prime, and because the lender recalculates the payment to keep the original amortization on track, the borrower's regular installment rises when prime rises and falls when prime falls.
How the rate and payment move
Canadian variable mortgage rates are usually quoted as prime plus or minus a fixed spread, for example prime minus a set discount. Prime is set by each lender but tends to move in step with the policy interest rate set by the Bank of Canada. On an adjustable-rate product, a change in prime triggers a change in the scheduled payment, so the borrower feels the shift immediately in monthly cash flow rather than only at renewal.
This differs from a static-rate variable mortgage, where the payment stays the same when prime moves and the lender instead adjusts how much of each payment goes to interest versus principal. Both are variable products, but only the adjustable version changes what leaves the borrower's bank account each period.
Why it matters to a borrower
Because the payment is not fixed, budgeting is less predictable. A rise in prime raises the required payment, which can strain cash flow or affect qualification ratios if the lender recalculates. A drop in prime lowers the payment, though some borrowers choose to keep paying the higher amount to pay the mortgage down faster, subject to their prepayment privilege.
Qualification still runs through the federal mortgage stress test. Under OSFI Guideline B-20 for federally regulated lenders, and comparable rules for insured mortgages, borrowers must qualify at a higher qualifying rate than the contract rate. Confirm current figures with the lender or on the OSFI and CMHC websites.
Adjustable vs static variable
- Adjustable-rate variable: rate floats with prime; payment changes when prime changes.
- Static-rate variable: rate floats with prime; payment stays level until the lender recalculates or renewal.
- Fixed-rate: rate and payment are set for the term, unaffected by prime.
Use the fixed vs variable calculator and the guide on fixed vs variable mortgage rates to compare payment patterns before choosing.
Frequently asked questions
What is an adjustable-rate variable mortgage in Canada?
It is a variable-rate mortgage where the interest rate follows the lender's prime rate and the scheduled payment changes when prime changes. Because the payment adjusts rather than staying level, a rise in prime increases the amount due each period, and a fall in prime reduces it. Terms and spreads vary by lender, so read the mortgage commitment carefully.
How is it different from a static-rate variable mortgage?
Both float with prime, but the adjustable version changes the payment amount when prime moves. A static-rate variable mortgage keeps the payment level and instead shifts the mix of interest and principal inside each payment, which can extend the effective amortization if rates rise. Each structure has different cash-flow implications.
Do I still need to pass the mortgage stress test?
Yes. Federally regulated lenders apply OSFI Guideline B-20, and insured mortgages have comparable qualifying rules, so borrowers generally must qualify at a higher rate than the contract rate. Because the payment on an adjustable-rate variable mortgage can rise, confirming how the lender assesses the payment is worthwhile before committing.
Sources
Related terms
- Variable-Rate Mortgage — A mortgage whose interest rate rises and falls with the lender's prime rate during the term instead of staying fixed.
- Static-Rate Variable Mortgage — A variable-rate mortgage whose payment stays fixed while the interest and principal split shifts as the lender's prime rate moves.
- Prime Rate — The prime rate is the interest rate Canadian banks charge their most creditworthy borrowers, and it is the benchmark used to price variable-rate mortgages and lines of credit.
- Fixed-Rate Mortgage — A fixed-rate mortgage keeps the same interest rate and the same scheduled payment for the entire mortgage term, so each payment is known in advance.
- Mortgage Stress Test — The federal mortgage stress test is a qualification rule that makes lenders check whether you could afford your mortgage if rates were higher than your contract rate.