# Variable mortgage rates?



## Steve19 (Jun 29, 2009)

Hi everyone,

2 questions for you all.

1) How do banks calculate their variable mortgage rate? 

Of all the major banks offering variable rates, I have always found that ING and PC offer the lowest rates (fixed or variable), ING in particular. I was looking into variable rates this morning and ING offers a 5 year variable rate @ 2.15% and PC is 2.25%. I understand the variable rate will change when prime changes, but how does each bank calculate what they offer? Can their calculation change? It always seems that variable rates are always lower than prime - is this always the case? 

2) If one wants to forcefully pay off their home within 7 years of purchasing it (my personal expectation in the upcoming years when I buy a house), why would a fixed mortgage rate be considered over a variable rate in this case? To me it makes sense that if you can forcefully pay off the mortgage asap, then a variable rate would be wise because despite rates rising/falling, you will _likely_ save on interest payments (a five year fixed rate would require you to pay more interest). 

Any advice would be great.
Thanks!
-Steve


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## andrewf (Mar 1, 2010)

1) The rate is based on what short-term financing costs the bank. The rate they offer vs. prime is how they compete on price. They set the price at the level where they think they can maximize profit on spreads vs. growing their market share. Variable rates are often at a discount to prime, but when the BoC cut rates to 0.25%, the banks were seeing their spreads compressed too much. So, they didn't lower their prime rate in lockstep (I think they increased the spread between BoC overnight and their prime by 0.5% points) and they offered loans at prime, with no discount.

2) How long you want to take to repay the mortgage doesn't really affect whether you choose variable or fixed rate. Variable tends to be cheaper than fixed, so fixed rate is like purchasing interest rate insurance.


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## jamesbe (May 8, 2010)

You can easily get prime - 0.65% right now or even prime -0.7% which is better than ING or PC.


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