With a Variable Rate Mortgage (VRM) or an Adjustable Rate Mortgage (ARM), the borrower can take advantage of the fluctuations in the market when the Bank of Canada sets the prime rate.
It’s pretty simple really: When the interest rate dips, you’ll pay less interest, and when it rises you’ll pay more.
However, here’s where it gets interesting…
With a VRM, your monthly payments will always be the same, but with an ARM, your monthly payments will increase or decrease depending on the direction of the fluctuations in the prime rate.
So, if you have a VRM, and the interest rate increases, your monthly installment will remain the same. However, more of your payment will go towards interest, and less will be applied to the principal. If the interest rate drops, then the reverse holds, and more of your payment will be applied towards principal and less towards interest.
Now, if you have an ARM, and the interest rate rises, so will your monthly payments. The difference here, however, is that the amount that gets applied to the principal remains the same, though you will pay more in interest. Therefore, as you indubitably predicted, when the interest rate drops, your monthly payments will also drop accordingly. The amount applied to the principal, again, remains the same, although you’ll pay less in interest.
It’s tricky to choose between one of these, but there’s certainly undeniable advantages and disadvantages to each. It’s up to you to weigh your option, and consider how not only your finances but also how your persona matches up with each.
It’s all about what you’re comfortable with from month to month.