Variable Interest Rate
Quick Definition
An interest rate that fluctuates based on the prime rate.
Full Explanation
A variable interest rate changes in response to fluctuations in the prime rate, which itself follows the Bank of Canada's overnight rate decisions. In Canada, variable-rate mortgages are often expressed as 'prime minus' or 'prime plus' a percentage (e.g., prime - 0.70%). When rates fall, your interest cost decreases; when rates rise, so does your cost. Variable-rate mortgages typically have lower penalties for early exit, making them popular for borrowers who anticipate selling or refinancing within their term.
Related Terms
Fixed Interest Rate
An interest rate that stays the same for the entire loan term.
Prime Rate
The base lending rate banks use, tied to the Bank of Canada overnight rate.
Interest Rate
The percentage charged on the principal loan balance per period.
Bank of Canada
Canada's central bank, responsible for monetary policy and setting the overnight rate.
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