A floating-rate mortgage changes according to the current interest rate set by the Bank Of Canada. This means the interest you pay each month can change based on the prevailing rate at the time.
The most common type of floating rate mortgage is the variable rate mortgage.
Understanding Variable Rate Mortgages
There are basically two types of variable rate mortgages, floating payment mortgages that fluctuate with the rate, and those with fixed payments.
Essentially your monthly mortgage payment stays the same, however, the amount of your payment that goes towards paying down the principle changes according to the current interest rate.
This means that the amount of principle and interest can change from one payment to the next if interest rates move up or down.
If rates go up, you pay more interest than and less principle. If rates go down, you pay more towards your principle and less interest.
But in both situations your payments stay the same.
There are some variable rate mortgages that have payments that change in accordance with the current interest rate.
With variable rate mortgages, borrowers must accept the possibility that interest rates could go up or down from one payment to the next. Lenders allow the borrow to convert their mortgage to a fixed rate at anytime in exchange for this.
As mentioned before, a variable rate mortgage usually has a lower interest rate than a fixed rate mortgage because the lender does not lose any money if interest rates increase.
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