What happens to monthly payments in a variable rate mortgage when interest rates increase, assuming the mortgage has a fixed payment structure?
Correct Answer
A) More interest and less principal in each payment
In a variable rate mortgage with fixed payments, when rates increase, the payment amount stays the same but more money goes toward interest and less toward principal reduction. This can extend the amortization period if rates remain elevated for an extended period.
Why This Is the Correct Answer
Option A correctly identifies that in a fixed payment variable rate mortgage, rising interest rates cause a reallocation of the payment composition. The monthly payment amount stays the same, but a larger portion goes toward interest charges while less goes toward principal reduction. This is the fundamental characteristic of this mortgage structure and aligns with how Canadian lenders typically structure variable rate products with payment stability features.
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