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Try this instead You can save this article by registering for free here. Or sign-in if you have an account.Variable payments may feel relatively safe right now, but for millions of Canadians they aren’t. Photo by Getty ImagesIt’s remarkable how many people choose variable-rate mortgages (VRMs) because the payment is smaller.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorConsider today’s rates, for instance.The lowest nationally advertised uninsured five-year variable now sits at 3.74 per cent (prime minus 0.71 per cent), versus 4.29 per cent for the cheapest comparable fixed.On a $500,000 mortgage with a 25-year amortization, that’s about $2,560 a month instead of $2,709, a $149 monthly discount.The lower variable contract rate also means an easier pass on the federal mortgage stress test.SUBSCRIBER EXCLUSIVE: FP West: Energy Insider brings you behind the oilpatch’s closed doors with exclusive insights from insiders every Wednesday morning.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of FP West: Energy Insider will soon be in your inbox.We encountered an issue signing you up. Please try againIn other words, thanks to how the government’s qualifying rules are wired, today’s variable borrower can qualify for a mortgage roughly five per cent bigger on the very same income — no raise required.But here’s the problem: most borrowers who pick a term to save money focus on the payment, not the rate risk attached to it.And that mindset is more prevalent than usual right now, for three reasons:The Bank of Canada is parked at 2.25 per centThe central bank’s “preferred” inflation gauge (average core inflation) sits near the two per cent targetMost economists expect prime to sit more or less still through 2026.All of that makes variable payments feel relatively safe.For millions of Canadians, however, they aren’t.First, in many cases, the payment savings get spent, not banked.If the $149 payment savings is consumed, you’ve taken on rate risk and received nothing durable in return.That’s not a rate strategy; it’s a lifestyle subsidy.Second, the risk is asymmetric.That is, the bond market has priced in about four 25-basis-point Bank of Canada hikes over the next five years, according to CanDeal DNA.The borrower who needed the $149 discount to make their budget work is precisely the borrower who can’t easily absorb four-plus rate hikes, regardless of whether they passed the stress test.Third, on fixed-payment VRMs, a rising prime rate shrinks the principal portion of every payment. If rates jump high enough, borrowers can eventually hit their trigger rate — meaning the lender may increase their payment to ensure the interest is fully covered.(Jargon buster: The “trigger rate” is the rate at which your fixed variable payment exactly equals the interest due.)For the record, the average rate hike cycle in the inflation targeting era (post 1991) has been 2.82 percentage points — enough to hit the trigger rate.(Note: unlike VRMs, adjustable-rate mortgage (ARM) payments automatically move up and down with prime to keep your amortization schedule on track.)Finally, there’s the potential of payment shock at renewal. Even if rates surge but payments remain static during the entire five-year term, a borrower renews at a balance that’s shrunk far less than the originally scheduled amortization.The remedy for these problems, in large part, is simple.If a variable mortgage is right for you, all you need to do is set your payment to the same amount you would have paid with a fixed-rate mortgage.If you do that — i.e., voluntarily increase your variable-rate payment to match the fixed-rate payment — then:If rates stay flat: After five years, you’d owe $423,458 on that $500,000 mortgage. The variable borrower making only the minimum $2,560 payment would owe $433,277 — roughly $9,800 more than you. Better still, the extra payments would put you on pace to be mortgage-free more than two years earlier.If rates jump 200 basis points in short order: Your payment doesn’t change, so there’s no immediate payment shock. Moreover, your extra payments reduce trigger-rate worries. After five years, you’d still owe about $10,300 less than the variable borrower making minimum payments. That borrower gets the worst of it: almost their entire $2,560 payment goes to interest at the new, higher rate, so their balance barely shrinks. (To simplify the illustration, this assumes the full rate change occurs immediately and remains in place for five years.)If rates drop 200 basis points: You’d owe just $375,560 after five years — about $9,300 less than the minimum-payment borrower. Keep the extra payments flowing and, by term’s end, you’d project to be mortgage-free 15 months ahead of them.Long story short, what payment-matching really buys you is prepaid rate protection.Match your variable payment to the fixed one, and prime can rise 55 basis points — just over two typical Bank of Canada hikes — before your payment is no longer enough to maintain the original amortization schedule.And that cushion grows every month, because each extra payment shrinks your balance faster, cutting the interest you owe.In other words, if hikes happen, there’s less payment shock because your extra payment buffer absorbs some of it.If rates don’t rise, you’ll finish the term with more than two extra years knocked off your remaining amortization. So you end the five years with approximately 17 years and 10 months remaining, rather than 20 years.It’s the rare strategy that wins in both states of the world.One caveat, though: If you’ve got a far better use for the savings — say, clobbering 21 per cent credit card debt — do that first.You’ve likely heard that variable rates have historically beaten fixed on interest savings (which is true).However, it’s important to understand why variable wins over the long run. It wins because the average interest rate over the term is usually lower over time — not because the payment starts out smaller.The lower rate only pays off financially if the payment difference goes toward your mortgage (or somewhere equally productive).Spend it instead and you retain every ounce of variable’s risk while forfeiting most of its reward.Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.For the best national insured and uninsured mortgage rates, updated daily, please visit our mortgage rate page here. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.