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A variable-rate mortgage (VRM) has an interest rate that moves up or down with the lender’s prime rate throughout the term. On most Canadian VRMs the payment amount itself stays fixed, so a prime-rate change shifts how much of each payment goes to interest versus principal, not the payment itself.
Most Canadian lenders design VRMs with a static payment: the dollar amount is set when the mortgage is registered and only changes if the lender adjusts it or the borrower renews. When prime rises, a larger slice of that fixed payment covers interest and a smaller slice reduces principal — and if prime rises enough, the payment can stop covering even the interest owed, reaching the mortgage’s trigger point.
This static-payment design is what separates a typical VRM from an adjustable-rate mortgage (ARM), where the payment itself moves with every prime-rate change instead of staying fixed.
Qualified at the stress test: VRM borrowers still qualify using the minimum qualifying rate — the greater of the contract rate plus 2 percentage points or 5.25% — not the current variable rate.
Priced off prime: the rate is quoted as a discount or premium to the lender’s prime rate, which itself tracks the Bank of Canada’s policy rate.
Trigger-rate risk: static-payment VRMs are the product type where a trigger rate and trigger point matter — a fixed-payment VRM can, in a rising-rate environment, stop covering interest in full.
Common on HELOCs too: the same prime-linked structure underlies most home equity lines of credit, though HELOC payments typically adjust with the rate rather than staying fixed.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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