Is a 3-Year Variable Rate Mortgage Term Right For You?

by Cait Flanders April 14, 2014 / No Comments

Flickr: nerdcoregirl

Two of the biggest decisions you’ll need to make regarding your mortgage financing are which mortgage rate type and mortgage term you want. Would you prefer a fixed or variable mortgage rate? And how long do you want to commit to that rate for? Each combination makes sense for different reasons, and the decision is usually personal. To get some insight, we decided to interview homeowners across the country, to see which rate types and terms they chose and why. Today, let’s look at what a 3-year variable rate is and who is choosing it.

What is a 3-Year Variable Rate Term?

Unlike a fixed rate, which remains unchanged for the duration of your mortgage term, a variable rate is attached to Prime rate. When you sit down with your mortgage broker to get pre-approved for a mortgage, the variable rate they offer you will be quoted as Prime +/- a percentage. For example: Prime – 0.50%. If Prime rate fluctuates up or down, your mortgage rate – and your mortgage payment amount – will fluctuate with it. And by choosing a 3-year term, you’re committing to that variable mortgage rate (and its potential fluctuations) for 3 years.

Features of a 3-Year Variable Rate Term

Here are some features of a 3-year variable rate mortgage term, which may or may not be reasons to choose it for your next mortgage term:

  • Your mortgage rate is attached to Prime rate, meaning it will fluctuate if Prime rate increases or decreases.
  • If your mortgage rate increases or decreases, your monthly mortgage payment amount will do the same; for this reason, you should have some wiggle room in your budget, to allow for the potential increase to your payment amount.
  • Some homeowners see the potential fluctuation that comes with variable rate mortgages as a risk, but variable rates have proven to be lower than fixed rates over time.
  • If you have to break your mortgage term early, your prepayment penalty would be just three months’ interest; this is the general rule for all variable rate mortgage terms.

Profile of a 3-Year Variable Rate Term Mortgage Holder

Based on this information, a homebuyer would need to be comfortable taking on a little bit of risk with their mortgage financing, in order to choose a variable rate term. Read our interview with Mike, to find out why he went with a 3-year variable rate term for his first mortgage:

What type of home did you buy and in which city?

I bought a 1-bedroom + den, 1-bathroom condo in Toronto.

When did you buy your home and what was the purchase price?

I paid $410,000 for my condo in 2011.

Did you choose a fixed or variable interest rate? Why?

I didn’t expect Prime rate to move in the short-term, so I felt safe going with a variable rate.

What interest rate did you get?

Prime – 0.85%. And because Prime rate has been sitting at 3.00% since 2010, my mortgage rate has been 2.15% (3.00% – 0.85%) for the whole term.

Were you happy with your interest rate in 2008?

I was really happy with my rate; it was the lowest I could find on the market.

Why did you choose a 3-year term?

I liked the flexibility of a short term. I knew there was a good chance I’d want to move into a house a few years later (and I am going to!), but I still wanted to get into the market, so the 3-year term was perfect.

What factors influenced your decision?

For starters, there was a significant discount for variable versus fixed, which appealed to me. I also anticipated that I might want to move to a fixed rate mortgage within a few years, given the likelihood that interest rates would start to go back up (and I still feel this way), but I felt variable was safe in the short-term.

Would you choose a 3-year variable term again? Why or why not?

I expect that I’ll move to a fixed rate mortgage when I buy a house, because of the expectation that mortgage rates will rise in the future. So, because current fixed rates are fairly low right now, I think I’ll lock into one for a longer period of time, to both secure a good rate and know how much my monthly mortgage payments will be for years to come.

If you think a 3-year variable rate mortgage term is right for you, talk to a mortgage broker about getting today’s best mortgage rate.