We ask, “Should I get a variable rate or fixed rate? Is a 40-year amortization too long?” And as borrowers, once these decisions are made, we have to live with them because changing our mind or making the wrong decision can cost a small fortune.

The Variable Interest Rate Mortgage, (VIRM), has always been considered the risk-takers brand of mortgage, reserved for hardened gamblers and armchair economists who believe rates will fall, or simply yield a lower average interest rate over its life span. In contrast, the fixed rate mortgage offers, as its name suggests, a rate and payment that’s set in stone for the length of its term. Compare that with VIRMs, which can either increase or decrease as financial market conditions change. In particular, VIRM rates float with prime, which is currently at 4.75 per cent. So when the Bank of Canada makes an interest rate announcement, which is actually a scheduled event (like the last one on June 10) borrowers with VIRMs can see as much as 0.25 per cent shaved off their mortgage rate.

In either case, borrowers who currently hold VIRMS are smiling today and watching their mortgage balances drop weight faster than America’s Biggest Loser. In fact, the interest rate on VIRMs is lower than on a conventional fixed-rate mortgage.

This is partly because fixed rates contain an inflation facto—a premium to cover the risk of inflation escalating. With a VIRM, this factor never has to be included because it is adjustable and constantly keeps pace with inflation, reflecting the short-term cost of borrowing funds. But what about when market conditions dictate increases in the prime lending rate, as they are predicted to in reaction to inflation rising in 2009? My advice: Get a convertible.

No, I don’t mean the new convertible BMW ... but don’t let me stop you. I am referring to a clause in the mortgage document that allows you to convert your VIRM into a fixed-rate mortgage. Without this advantageous clause, refinancing your mortgage would literally leave you agonizing all the way to the bank, negating any gains you may have made.
And to take this a couple of steps further, find out if your lender charges a fee to convert and what fixed interest rate they will offer you upon conversion—with some lenders you may be allowed to convert at no charge, but into an unnecessarily high interest rate, when in fact, there are some lenders offering the best of both worlds. Furthermore, conversion is allowed at any time with most lenders, so when it makes sense to lock in, you will be able to do so—and that means you save money!

Given the flexibility of today’s mortgage market and astuteness of today’s borrower, there is no need to gamble anymore, as you find ways to get ahead with your mortgage.