In Canada, “adjustable-rate mortgage” and “variable-rate mortgage” are often used as if they meant the same thing, but they describe two different ways of handling a floating rate. Both follow the lender’s prime rate; the difference is what happens to your payment when prime moves. Whether a floating rate suits you at all is a separate question, covered in fixed vs variable; this guide is about the two kinds of floating rate, one of the rate-type guides in the mortgage types and features hub.
ARM vs VRM: the key difference
| Feature | Adjustable-rate mortgage (ARM) | Variable-rate mortgage with fixed payments (VRM) |
|---|---|---|
| Rate | Moves with prime | Moves with prime |
| Payment amount | Changes when prime changes | Stays the same |
| Principal and interest split | Stays on schedule to repay within the amortization | Shifts: less principal when rates rise, more when they fall |
| Trigger rate | Not reached, because the payment adjusts | Can be reached if rates rise far enough |
| Negative amortization | Doesn’t happen | Possible once the trigger rate is passed, if the lender allows it |
| Budgeting | The amount you pay changes | The amount you pay stays constant |
How an ARM works
With an adjustable-rate mortgage, each time your lender changes its prime rate your payment is recalculated so the mortgage still pays off within the amortization. You never fall behind on principal; the cost of a rate rise shows up immediately in the payment.
A $500,000 balance with 25 years left, at prime minus 0.50%, compounded semi-annually:
| Change in prime | Your rate | Monthly payment |
|---|---|---|
| Starting point | 4.00% | $2,630 |
| Up 0.25 points | 4.25% | $2,698 |
| Up another 0.25 points | 4.50% | $2,767 |
| Down 0.50 points from the start | 3.50% | $2,496 |
Each quarter-point step moves the payment by roughly $70 a month on this balance. In practice the payment is recalculated on the balance and amortization remaining at the time of the change.
How a VRM works, and the trigger rate
With a fixed-payment variable mortgage, your payment stays the same and the share of it that pays interest changes instead. When rates rise, less of each payment reduces the principal; when they fall, more does.
The same $500,000 balance, with the payment fixed at the 4.00% amount of $2,630 and interest calculated monthly:
| Your rate | Interest in the month | Principal in the month |
|---|---|---|
| 4.00% | $1,667 | $963 |
| 4.50% | $1,875 | $755 |
| 5.00% | $2,083 | $547 |
The payment stops covering the interest at about 6.31% on this balance: that is the trigger rate. Above it, the shortfall is either collected from you or added to the balance.
Once the trigger rate is reached, the lender may require you to increase your payments, make extra payments to cover the excess interest, or switch to a fixed rate. How the trigger rate is set and disclosed is covered in the trigger rate explained, and what happens when the balance grows is covered in negative amortization.
Which kind fits which borrower
These are the trade-offs each structure is built around, not a recommendation.
An ARM tends to suit borrowers who:
- want every payment to keep the mortgage on schedule, with no trigger-rate surprise;
- have room in their budget for the payment to rise;
- want falling rates to lower the payment straight away.
A fixed-payment VRM tends to suit borrowers who:
- need the same payment every month to budget;
- expect any rate rise to be short, so the payment smooths it out;
- can make lump-sum prepayments to catch up on principal after a rise.
Canadian ARMs vs American ARMs
The same name covers quite different products.
| Feature | Canadian ARM | American ARM |
|---|---|---|
| Rate adjustment | Moves with prime whenever the lender changes it | Adjusts at set intervals, often yearly after an initial fixed period |
| Initial fixed period | None: the rate floats from day one | Common: a “5/1 ARM” is fixed for five years, then adjusts each year |
| Rate caps | Usually none on the floating rate itself | Usually periodic and lifetime caps |
| Term | Usually five years, then renewal | The loan can run 30 years |
| Penalty to break | Usually three months’ interest | Depends on the loan |
How the floating rate compares with fixed
Floating rates are usually lower than five-year fixed rates because the borrower takes on the rate risk, but the gap changes with the market and can disappear or reverse. How the size of that gap shapes the decision is covered in fixed vs variable, and today’s rates are on the mortgage rates page.
What to ask your lender
- Is it adjustable-payment or fixed-payment? Lenders don’t use the terms consistently, so ask how your payment changes when prime moves.
- What is the discount or premium to prime? Prime minus 0.50% and prime minus 1.00% are very different over a term.
- Is the discount guaranteed for the full term?
- On a fixed payment, what happens at the trigger rate? Will the lender raise the payment, ask for a lump sum or add interest to the balance?
- What is the penalty to break? It’s usually three months’ interest on a variable rate; how mortgage penalties are calculated explains the methods.
- Can I lock into a fixed rate mid-term, and at what rate? See convertible mortgages.
Sources
The figures and rules on this page come from these sources, last checked against them between September 29, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Data table
- Financial Consumer Agency of Canada: House Standing Committee on Finance (February 13, 2024) ISSUE: Variable rate mortgages…
- Financial Consumer Agency of Canada: Paying your mortgage when experiencing financial difficulties
- Justice Laws (Canada): Financial Consumer Protection Framework Regulations