Variable Rate Mortgages

Calgary Select: Variable Rate Mortgages


Is a Variable Rate Mortgage right for you?

13_MoneyTalk.jpg(NC)-When it comes to buying or owning your home, deciding on whether to go with a fixed rate or a variable rate mortgage is probably one of the most difficult decisions you'll have to make. If you are currently faced with this dilemma, how do you know what's right for you?

A variable rate mortgage is a mortgage with an interest rate that changes with the prevailing market prime rate during the mortgage term. The portion of your payment that goes toward the principal may increase or decrease as the interest rate changes, but your regular payment will typically stay the same. 13_CIBCGraph.jpgA fixed rate mortgage is one where your interest rate remains the same for the duration of the term of your mortgage.

Historically, variable rate mortgages have generally offered lower interest rates than fixed rate mortgages. There is strong evidence that variable rate mortgages come out ahead in terms of savings for the mortgage holder, yet many still shy away from these products for fear that their monthly payments may change. This is not always the case. Take for example the CIBC Better Than Prime Mortgage. With this variable rate mortgage, your monthly payments remain the same even if the prime-lending rate fluctuates. This will help you budget your monthly expenses more effectively while capitalizing on lower interest rates.

The chart compares a variable rate product such as the CIBC Better Than Prime mortgage rate against a typical five-year fixed rate mortgage over the period of February 1, 1996 to February 1, 2005. As you'll see, over this period the variable rate mortgage has been lower than the fixed.

For this reason, over the long-term there is a greater possibility of variable rate mortgage holders coming out ahead versus those who hold a fixed rate mortgage. To illustrate, let's use a $140,000 mortgage amortized over 25 years and compare the monthly payments of the two types of mortgages: a five-year closed fixed rate mortgage at 5.90% and a variable rate mortgage such as the CIBC Better Than Prime Mortgage which currently offers a rate of 3.49% for the first nine months and 4.25% for the remainder of your term (APR 4.13% for a five-year term as at September 8, 2005, subject to change). Even if prime lending rates increased by 0.50% per year over a five-year period, you could save as much as $4,759 at the end of your five-year term with the CIBC Better Than Prime mortgage.

Like with any major decision, selecting between a variable and fixed rate mortgage requires you to understand the facts along with your tolerance for perceived risk and confidence about the future. Simply ruling out variable rate mortgages before careful consideration may be putting your hard earned money at risk.

More information regarding variable rate mortgages are available from your local CIBC branch, by calling 1 800 465-CIBC (2422) or visiting the CIBC website at

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