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Mortgage rates4 min readUpdated October 30, 2026

How variable-rate mortgage payments work

A variable-rate mortgage is priced relative to the lender's prime rate, and prime moves when the lender's funding costs move. What happens to you when prime changes depends on the kind of variable mortgage you hold: some change the payment, others keep the payment and change how quickly the balance falls. This guide follows one illustrative household through both.

Key points

  • A variable mortgage rate is generally expressed as the lender's prime rate plus or minus a spread.
  • Each lender sets its own prime rate, influenced by the Bank of Canada's target for the overnight rate.
  • Some variable mortgages adjust the payment when prime moves; others keep it fixed and change the split between interest and principal.
  • Variable-rate mortgages commonly compound monthly, while fixed rates compound semi-annually.

Meet the household

Picture an illustrative household taking a $450,000 variable-rate mortgage at 4.45%, with a 25-year amortization and a five-year term. The rate is chosen to look like a realistic offer, not to report today's market.

Their first payment is $2,488.49. Because variable mortgages commonly compound monthly, the lender applies one-twelfth of the annual rate, 0.37%, to the outstanding balance each month. (Fixed-rate mortgages work slightly differently; see Canadian mortgage compounding.)

Worked exampleYear one on an illustrative variable mortgage
Amount
$450,000
Rate
4.45%
Payment
$2,488.49
Year-one interest
$19,822
Year-one principal
$10,040
Interest share of payments
66.38%
Monthly periodic rate
0.37%
Assumptions: An illustrative $450,000 variable-rate mortgage at 4.45%, 25-year amortization, monthly payments, monthly compounding, rate unchanged for the year. Computed by the site's calculators.

Where the rate comes from

The rate on a variable mortgage is generally expressed as the lender's prime rate plus or minus a spread, such as "prime minus a quarter". The spread is agreed when you sign; prime is the part that moves. Check your agreement for the spread and for whether it is fixed for the whole term.

Each financial institution sets its own prime rate as a function of its funding cost, which is influenced by the Bank of Canada's target for the overnight rate, the policy interest rate. That is why prime-linked rates usually move soon after a policy-rate announcement. For the full chain, read how the Bank of Canada rate affects you and the prime rate, explained.

Year one: where the money goes

If the rate holds all year, the household pays $19,822 of interest and $10,040 of principal, so 66.38% of what they pay goes to interest. That split shifts gradually toward principal as the balance falls, as long as the rate stays where it is.

The rest of the story is what happens when it doesn't.

Mitey the yeti sits on a stone ticking off a checklist on a clipboard, a house key beside him
Know which kind of variable you have before prime moves, not after.

When prime moves: two designs

Suppose prime rises by a quarter of a point and the household's rate goes from 4.45% to 4.70%. What happens next depends on how the mortgage is built.

  • Adjustable payment. The payment is recalculated when the rate changes, so the amortization stays on schedule. On these numbers the payment rises by $64.11 a month.
  • Fixed payment. The payment stays the same, but more of it goes to interest and less to principal. If rates rise far enough, the payment may cover only the interest; that point is often called the trigger rate, and the agreement explains what happens if it is reached.

What a quarter point does over the term

If the higher rate held for the full 5-year term on the adjustable-payment design, the household would pay $5,496 more interest and finish the term owing $1,650 more. Treat that as a sensitivity check rather than a prediction: the rate could move again in either direction.

To test your own balance against a few possible moves, use the rate difference calculator or the mortgage payment calculator.

Worked exampleIf the rate rose a quarter point and stayed there
At 4.70%At 4.45%
Monthly payment$2,552.60$2,488.49
Interest over 5 years$99,834$94,337
Balance after 5 years$396,677$395,028
Assumptions: $450,000, 25-year amortization, five-year term, monthly compounding, payment recalculated at each rate and the rate held for the whole term. Computed by the site's calculators.

Is the variable offer itself competitive?

A change in prime affects every variable borrower at the same lender alike. What you negotiate is the spread. The variable mortgage checker compares your rate with the Bank of Canada's effective rate on new variable-rate mortgages, moved by any policy-rate change since that month and labelled as an estimate when it has been moved.

The household's illustrative 4.45% gets a mark of 52 out of 100 ("grade D"): 0.80% above a best published rate of 3.65%. On their balance, each 0.25 points is worth about $5,476 over the 5-year term.

Worked exampleGrading the illustrative variable offer
Rate
4.45%
Score
52
Verdict
grade D
grade
D
Benchmark
3.65%
typical
4.15%
Gap
0.80%
Direction
above
Cost vs benchmark
$17,472
Assumptions: An uninsured $450,000 variable-rate mortgage, five-year term, 25-year amortization, graded against the lowest published rate in Ontario when this page was built. Computed by the site's calculators.

Questions to ask before you sign

Write the answers down beside the rate. Two variable offers with the same spread can still differ on every one of these points. The new mortgage script has wording for asking about the spread.

  1. When prime changes, does my payment change, or only the split between interest and principal?
  2. What is my spread to prime, and is it fixed for the term?
  3. If the payment is fixed, at what rate would it stop covering the interest, and what happens then?
  4. How is interest compounded?
  5. Can I convert to a fixed rate during the term, and at which rate?
  6. How is the prepayment penalty calculated if I break the mortgage early?

Questions people ask

Does my variable payment change on the day the Bank of Canada announces a move?

Not necessarily on the same day. Your rate follows your lender's prime rate, which each institution sets itself. Your agreement or the lender's notice tells you when a change takes effect and, for an adjustable-payment mortgage, when the new payment starts.

What is a trigger rate?

On a variable mortgage with fixed payments, it is the rate at which the payment covers only the interest and none of the principal. The agreement sets out what happens if rates reach it. FCAC's guidance on rising interest rates explains the options worth discussing with your lender.

Is a variable rate cheaper than a fixed rate?

Nobody can say in advance. A variable rate can rise or fall during the term, while a fixed rate stays put. Compare each offer with its own benchmark in the checker and look at what a rate move would do to your payment. Our fixed vs variable guide walks through it.

Can I negotiate the spread to prime?

You can ask. Prime is the lender's own published rate, but the spread is part of the offer, and a competing written quote gives the conversation something concrete to work from.

Why does the variable checker sometimes show an adjusted benchmark?

The effective-rate series is monthly and published with a lag of roughly two to three months. If the policy rate has moved since that month, the checker moves the benchmark by the same amount and labels it as an estimate. Details are on the methodology page.

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