You have probably heard of Variable Rate Mortgages (VRM) but you may not have a clear idea as to exactly how they work. This type of mortgage has become very popular in recent years as there can be a tremendous advantage over a fixed rate mortgage.

The most important thing to know is the difference between how the rates are set for fixed rate mortgages and VRM. VRM revolves around the "prime rate". "Prime" is set based on the Bank of Canada's rate, plus whatever minimal increase the major banks have decided to use as a premium. While fixed rates are safe, they are often well above the rate on the VRM and fixed rates are usually based on the Canada Bond rates plus 1-2%. With many VRM, the lenders offer a "prime minus" discount and fluctuate as prime changes. However, most give you the comfort of being able to lock in the mortgage to a fixed term should you feel that rates are heading higher.

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