Adjustable vs true variable (& trigger rate)

When people say "variable" they're really describing two products. An adjustable-rate mortgage (ARM) ties your interest to the lender's prime rate, and when prime moves, your monthly payment moves with it. Rate up, payment up; rate down, payment down. It's honest and transparent: you feel every change immediately, which stings when rates rise but means your amortization (the number of years to pay the loan off) stays on track. A true variable-rate mortgage (VRM) keeps your payment fixed even as the rate floats. When rates rise, the lender doesn't change your payment; instead a bigger slice of that same payment goes to interest and a smaller slice to principal, so your amortization stretches out. When rates fall, more goes to principal and you pay off faster.

The fixed-payment version feels comfortable because your budget doesn't move, but that comfort hides a mechanism called the trigger rate. That's the interest rate at which your fixed payment no longer covers even the interest owing. Past that point you're not paying down anything, and on many mortgages the unpaid interest gets added to your balance (negative amortization, meaning your loan grows instead of shrinks). Push further and you hit the trigger point, usually when your balance climbs back up to your original loan amount (or in some cases the amount you're allowed to owe against the home). At that stage your lender contacts you and typically requires action: increase your payment, switch to a fixed rate, or make a lump-sum payment. This isn't hypothetical; when the Bank of Canada raised its policy rate rapidly through 2022 and 2023, a large share of fixed-payment variable holders hit or neared their trigger rate, and the federal banking regulator (OSFI) publicly flagged the extended amortizations that resulted.

The practical difference: with an adjustable payment you never hit a trigger rate, because your payment always keeps pace with the interest owing. With a fixed payment you trade short-term budget stability for the risk that a rate you didn't see coming quietly erases your progress, then arrives as a demand to pay more anyway. Neither is "the good one." They price similarly and the underlying rate is the same; what differs is where the shock lands, on your monthly cash flow or on your amortization.

One more thing worth knowing before you sign: the label on the paperwork doesn't always tell you which one you have. Some lenders market a fixed-payment variable simply as "variable," and the trigger-rate mechanics may be buried in the disclosure. The question that settles it: "If prime goes up, does my payment change, or does my amortization change?" If a lender or broker can't answer that plainly for the specific product in front of you, that's your signal to keep asking until they do.