A buyer in Victoria is considering a variable-rate mortgage. In BC's market context, what is the primary risk associated with choosing a variable rate over a fixed rate?

Q: What is the correct answer to: A buyer in Victoria is considering a variable-rate mortgage. In BC's market context, what is the primary risk associated with choosing a variable rate over a fixed rate?

The correct answer is Monthly payments or amortization periods may increase if the Bank of Canada raises the overnight lending rate. Option B is correct because the primary risk of a variable-rate mortgage is that monthly payments or amortization periods may increase if the Bank of Canada raises the overnight lending rate. Variable-rate mortgages are tied to the lender's prime rate, which follows the Bank of Canada's rate. In BC's high-value markets, rate increases can translate to hundreds of dollars per month in additional costs.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Variable-rate mortgages can be structured in two ways: adjustable-rate (where the payment changes when rates change) or fixed-payment variable (where the payment stays the same but the amortization adjusts). In BC, where average home prices are among Canada's highest, the impact of rate changes is amplified. A 1% rate increase on a $800,000 mortgage can increase monthly payments by approximately $400-500. The Bank of Canada sets the overnight rate approximately 8 times per year, and any change typically flows through to variable-rate mortgage holders within days.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Variable means VULNERABLE. When the Bank of Canada raises rates, your payments go UP or your amortization gets LONGER. In BC's expensive market, even small increases hit hard. Think 'Variable = Vulnerable to BoC.' When the exam asks about variable rate risks, the answer involves Bank of Canada rate increases affecting payments or amortization. Reject answers about starting rates, property value restrictions, or property type limitations.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

The connection is: Bank of Canada overnight rate → lender prime rate → variable mortgage rate → borrower's payments/amortization. Understanding this chain helps answer any variable rate question.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A buyer in Victoria takes a variable-rate mortgage at prime minus 0.5% on their $900,000 home. When the Bank of Canada increases the overnight rate by 0.25%, the lender's prime rate increases by the same amount, and the buyer's effective mortgage rate rises from 5.2% to 5.45%. This increases their monthly payment by approximately $115, adding about $1,380 per year to their housing costs.

Question

Mortgage & Real Estate FinanceBCMEDIUM

A buyer in Victoria is considering a variable-rate mortgage. In BC's market context, what is the primary risk associated with choosing a variable rate over a fixed rate?

Answer Options

A

Variable rates always start higher than fixed rates in BC

B

Monthly payments or amortization periods may increase if the Bank of Canada raises the overnight lending rate

C

Variable rate mortgages are not available for properties over $1 million in BC

D

BC legislation prohibits variable rates on strata properties