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?
Correct Answer
A) Payments or amortization may increase if the Bank of Canada raises its overnight rate
Variable-rate mortgages are tied to the lender's prime rate, which follows the Bank of Canada's overnight rate. When rates rise, borrowers with variable rates see either increased payments or extended amortization periods. In BC's high-value markets, even small rate changes can significantly impact monthly costs.
Why This Is the Correct Answer
Option A 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.
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