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August 24, 2025

When shopping for a mortgage in Canada, one of the big decisions you’ll face is whether to go fixed or variable. For those leaning variable, it’s important to understand how prime rate–linked mortgages actually work — and the subtle but critical differences between the two main types available.

The Two Types of Prime Rate-Linked Mortgages

1. Adjustable Rate Mortgage (ARM)

With an adjustable rate mortgage, your payment moves up or down whenever the lender’s prime rate changes. For example, if prime rises by 0.25%, your interest rate rises too — and so does your payment. The benefit is that your amortization (the length of time it will take to pay off your mortgage) stays on track, since the payment is always recalculated to reflect the new interest rate.

Conversely, if the prime rate falls, your payment decreases to maintain the original amortization. Some borrowers argue that the payment should stay the same in a falling rate environment so that more money can be applied toward principal and the amortization shortened. But the nature of the product doesn’t allow for this automatically. That said, you can request to keep your payment at its previous level to accelerate your repayment — it just isn’t built into the product by default.

2. Variable Rate Mortgage (VRM)

This version works differently. Your payment stays the same, regardless of prime rate changes. What shifts is how much of your payment goes toward interest versus principal:

In a falling rate environment, more money gets applied to the principal. This helps you pay off your mortgage faster and shortens your amortization.

In a rising rate environment, more of your payment is consumed by interest. The principal portion shrinks, and your amortization quietly stretches longer.

This distinction between adjustable and variable is one of the most important things to grasp before committing.

The Conversion Option — Not Always as Flexible as It Seems

Many Canadians are told that with a variable mortgage, they can lock into a fixed rate at any time. That’s true in principle — but the details vary widely by lender. Here are some common scenarios:

Matching the remaining term: If you’re two years into a five-year variable mortgage, most lenders will allow you to convert into a fixed mortgage for at least the remaining three years, or further out (i.e. 5yr fixed).
Forced into a 5-year fixed: Some lenders only offer conversion into a new 5-year fixed term, regardless of how much time is left on your variable.
No conversion allowed: A handful of variable products don’t offer any conversion option at all.

Before assuming you can switch into any fixed term you like, it’s important to ask your lender or broker exactly what your contract allows.

The Catch With Conversion Rates

Even if your mortgage does allow conversion, the rate you’re offered may not be the best on the market. Lenders know they have leverage — if you find a better fixed rate elsewhere, you’d have to break your mortgage (and pay a penalty) to move. As a result, the “conversion” rate they present is often higher than the fully discounted fixed rates you might see advertised.

In other words: flexibility exists, but it comes at a cost.

Your best strategy is to work with a lender that offers competitive, discounted conversion rates, and ideally one that allows your mortgage broker to negotiate directly on your behalf. This signals to the lender that you’re well represented and fully aware of current market rates. When a broker makes that call, lenders know they’re being compared against competitors — and that usually motivates them to put their best offer on the table.

The Bottom Line

Prime-linked mortgages can be powerful tools, especially in a falling rate environment, but they come with nuances that aren’t always clearly explained up front:

Understand the difference between adjustable (payment changes) and variable (payment fixed, amortization changes).
Ask detailed questions about your conversion options — term lengths, restrictions, and timing.
Don’t count on locking into a “great deal” down the road, prepare for the worst, and hope for the best. Conversion rates are rarely the sharpest on the market.

If you’re entering a prime rate–linked mortgage thinking you’ll just wait for the perfect chance to lock into a rock-bottom fixed rate, you may be setting yourself up for disappointment. The right mindset from day one should be: “prepare for the worst, hope for the best.” And if you’re not comfortable with the potential worst-case scenario, then you should seriously reconsider whether a variable or adjustable mortgage is the right choice for you in the first place.

Wondering if a variable rate mortgage is good for you?