Variable rate

Definition

A rate that follows the lender’s prime rate, with a spread set in the agreement, for example prime minus 0.8%. Two mechanics exist. With a variable payment, the instalment changes with every rate move. With a fixed payment, the instalment stays the same but the share going to principal varies; if the rate rises enough that the payment no longer covers the interest, you reach the trigger rate and the lender requires an adjustment. Example: on $400,000, a one-point increase adds about $230 a month on a variable payment. The exit penalty is generally three months’ interest, which makes a variable rate cheaper to break. Before choosing, test your budget with a two-point increase, not with today’s rate.