What is a TD Variable Rate Mortgage?

Getting a mortgage is one of the biggest financial commitments most people make in their lives. With so many options out there, it can be tricky to know which type of mortgage is right for you. One popular option offered by many lenders, including TD Bank, is a variable-rate mortgage. But what exactly does that mean?

A variable-rate mortgage is a loan with an interest rate that fluctuates over time based on changes in the prime rate. The prime rate is the lowest rate banks charge preferred customers. As the prime rate goes up or down, so does the interest rate on a variable-rate mortgage. This differs from a fixed-rate mortgage which has an interest rate that stays the same over the full term of the loan.

How Does a TD Variable Rate Mortgage Work?

TD variable rate mortgages are linked to the TD Prime Rate. This means the interest rate charged on a TD variable mortgage is equal to the TD Prime Rate plus a set percentage, or “spread.” For example, if the TD Prime Rate is 3% and your spread is 1.15%, your mortgage rate would be 4.15%.

If the TD Prime Rate increases, your mortgage payment goes up. If it decreases, your payment goes down. TD typically only adjusts variable rates once per quarter, so your payment would not fluctuate daily.

The spread you receive on a TD variable mortgage depends on many factors including your down payment amount, credit score, and overall application. Typically spreads range from 0.80% to 1.15% for low-risk borrowers.

Pros and Cons of a Variable Rate Mortgage

Variable-rate mortgages come with certain advantages and disadvantages compared to fixed-rate mortgages.

Pros:

• Lower interest rates: On average, variable rates are lower than fixed rates, so you pay less interest over the term of the loan.
• Take advantage of decreases: If the prime rate goes down, your mortgage payment decreases. This provides savings.
• Flexible terms: Variable-rate mortgages often have flexible repayment options.

Cons

• Unpredictable payments: Your monthly mortgage cost can go up if the prime rate increases. This makes budgeting difficult.
• Potential for higher rates: While variable rates are often initially lower than fixed rates, there is the possibility they exceed fixed rates over time as the prime rate rises.
• More risk: You take on more interest rate risk compared to a fixed rate.

So a variable rate mortgage makes sense for borrowers comfortable with some fluctuation in payments in exchange for potential savings.

What Factors Influence TD Variable Rates?

The prime rate is the key factor determining variable mortgage rates. TD bases this on the Bank of Canada’s overnight lending rate which is what major banks use to borrow from each other.

When the Bank of Canada raises or lowers this rate, banks adjust their prime rates accordingly. This feeds through variable-rate mortgages.

Some reasons the Bank of Canada may adjust rates include:

• Economic growth – Central bank boosts rates to prevent overheating when the economy is strong. Lowers rates to stimulate growth when the economy is struggling.
• Inflation – As inflation rises, rate hikes cool demand. Rate cuts encourage spending if inflation is low.
• Currency value – Higher rates maintain attractive returns on Canadian assets/currency for foreign investors.
• Employment – Low rates support job growth in tough times. Rate hikes prevent labor shortages if the economy nears full employment.

So while not directly tied to the housing market, the prime rate moves with the overall economy which influences variable mortgage rates.

Should You Choose a Variable or Fixed Mortgage Term?

Deciding between a variable or fixed-rate mortgage depends on your situation. Here are a few key factors to consider:

• Your timeline – How long do you plan to keep the mortgage? Variable rates can offer more savings over short terms of 1-3 years. Fixed rates provide stability for long terms of 4-5+ years.
• Your budget – Can you handle potential payment increases if the prime rate rises? If not, lean towards a fixed rate.
• Interest rate forecast – Consider expert forecasts. If major hikes are expected, fixed rates could provide peace of mind.
• Risk tolerance – Are you comfortable with interest rate uncertainty? If you prefer stability in housing payments, fixed rates may be better.

Speak with a TD mortgage specialist about your needs. They can provide rate forecasts and help determine if a variable or fixed mortgage aligns best with your financial situation.

Tips for Managing a TD Variable Rate Mortgage

If you opt for a TD variable rate mortgage, here are some tips that can help you manage payments:

• Maintain a budget with some “payment cushion” for potential increases
• Seek out the lowest spread you qualify for
• Consider making accelerated bi-weekly or lump sum payments when possible to pay the mortgage down faster
• Review payment amount frequently and adjust variable payments when rates decrease to pay more principal
• Consider locking into a fixed rate if variable rates rise significantly higher
• Use rate triggers – convert to a fixed rate if the prime reaches a certain level
• Refinance as soon as possible if rates spike for cost savings

Conclusion

While variable-rate mortgages come with some uncertainty, they can offer advantages like lower costs and flexible terms. Understanding how TD variable mortgages work and weighing the pros and cons allows you to make an informed decision on what type of mortgage works best for your homebuying needs and financial situation. Being proactive by budgeting carefully and even making prepayments can help you manage a variable mortgage successfully.

Secure your dream home with confidence, knowing our updated TD Mortgage Calculator can help you Determine Monthly Payments effectively.

William Lyon