Definition
A variable-rate mortgage has an interest rate that fluctuates with your lender's prime rate. The contract locks in the negotiated spread (e.g. "prime – 0.75%"), and the effective rate changes whenever the lender adjusts prime — typically after a Bank of Canada rate decision.
Two flavours exist: (a) static-payment variable — your monthly payment stays the same but the interest vs. principal split changes; (b) adjustable-rate mortgage (ARM) — your monthly payment changes with each rate adjustment. Flavour (a) can hit a "trigger rate" if rates rise sharply (which happened to many Canadian borrowers in 2022-2023).
Main advantage: breakage penalty capped at 3 months of interest, regardless of IRD — often a several-thousand-dollar swing vs. a fixed. Main drawback: upside-rate exposure. Over rolling 30-year windows, variables beat fixed rates most of the time (classic Milevsky study), but the 2022-2024 window reversed that trend.