How does a Variable Rate Mortgage typically determine its interest rate?

A Variable Rate Mortgage typically determines its interest rate by linking it to a benchmark rate, which is often the bank's prime rate or the Government of Canada treasury bond rate. These benchmark rates fluctuate based on economic conditions and monetary policy set by central banks. As these indices change, so too does the interest rate on the variable mortgage, allowing borrowers to benefit from potential decreases in interest rates, though it also exposes them to the risk of rate increases.

This dynamic structure means that borrowers may see their monthly payments vary over time in response to changes in the underlying rate to which their mortgage is tied. This approach contrasts with fixed-rate mortgages, where the interest rate remains constant throughout the life of the loan. While consumer price indices and credit scores can influence overall lending practices and mortgage eligibility, they do not directly determine the rate of a Variable Rate Mortgage as the benchmark rates do.