Variable Rate Mortgage FAQ

06 August 2014
REMAX Realtron Realty Inc


What’s in a Variable Interest Rate Mortgage (VIRM)?

A Variable Interest Rate Mortgage (VIRM) is a mortgage with its interest rate set against prime.  You may hear of a VIRM mortgage today at “prime minus 40” (or p-40) which basically means that the interest rate for the term of the mortgage is set at the lender’s prime rate of interest less 40 basis points.  For example, if the lender’s prime rate is 3.00% when the mortgage funds, then the p-40 rate would be 2.60%.

At TD, the VIRM product has a set payment each month and it does not change with movement in the prime lending rate.  Instead, when the interest rate changes, the amount of interest and principal within the payment are adjusted.  For example, in the scenario mentioned above, if the lender’s prime rate dropped from 3.00% to 2.75%, then the p-40 VIRM rate would drop from 2.60% to 2.35%.  Conversely, if the prime rate increased from 3.00% to 3.25%, then the p-40 VIRM rate would increase from 2.60% to 2.85%.  Given the fact that the payment stays the same, what happens is that the interest portion of the payment adjusts, with the amount going towards principal  increasing or decreasing as the case may be.  This has a direct impact on the remaining amortization on the mortgage.

What’s important to bear in mind is that during a period where the variable interest rate is increasing regularly, the interest rate “could” potentially rise to the point where the current payments no longer cover the interest due and, as a result, the customer’s mortgage balance could actually start to increase.  We are currently operating in a stable interest rate environment which makes this scenario extremely unlikely to occur.  But it is absolutely something to consider when choosing a VIRM product.

At TD, whenever the interest rate changes, TD notifies the customer and suggests that they may wish to increase their payments to ensure that their mortgage balance continues to decline in relation to the original amortization selected.

  Prepared by:

Norma Chrobak

  • Regional Sales Manager
  • TD Canada Trust
  • 416 806 3212