What happens to the monthly payment amount when a borrower chooses a variable rate mortgage and interest rates increase?
Correct Answer
C) The payment stays the same but more goes to interest
Most variable rate mortgages in Canada have fixed payment amounts. When rates increase, the payment stays the same but a larger portion goes toward interest and less toward principal, potentially extending the amortization period.
Why This Is the Correct Answer
Option C correctly identifies the standard structure of Canadian variable rate mortgages. Under most variable rate products, lenders maintain fixed payment amounts throughout the term. When interest rates increase, the payment allocation shifts - a larger portion services the higher interest cost while the principal portion decreases proportionally. This mechanism is governed by the mortgage contract terms and is the predominant structure offered by Canadian financial institutions. The Bank Act and provincial mortgage regulations allow this payment structure, providing borrowers with payment certainty while transferring interest rate risk through payment reallocation rather than payment amount changes.
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