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WHAT IS VARIABLE INTEREST RATE?

The variable interest rate can be called the interest rate that keeps swinging up and down based on an interest rate index. There are, of course, benefits of these variable rates. And there are major two types of variable rates-open variable rates and closed variable rates. According to the legislation governing mortgages in Canada, in an open variable rate mortgage, the rate of interest is fixed at the very beginning of the month and is not changed henceforth. The amounts to be paid remain steady. The interest rate can be preserved by converting the closed variable rate into a fixed rate mortgage. If this conversion is done, it must be seen to it that the term after conversion i.e. the resulting new period of time should be necessarily less than three years or the period that is remaining from the earlier term.

Because of the global economic meltdown, the Canadian Government is looking for ways to stabilize the economy and to generate growth at a considerable pace. This is achieved by decreasing the interest rates, especially the one day rates. It is noteworthy that the Canadian economy has derived quite good benefits out of these lower recent one day interest rates and the record is quite remarkable given the economic scenario in the past few years. It is very evident that the variable interest rate in Canada is not on the rise again. The mortgage rates are however different from the variable rates and it is found that the mortgage rates are increasing and they do not follow variable rate schemes. It is the Bank of Canada that regulates or controls the interest rates and the one day interest rates and determines the increase or decrease in the rates. All other banks in Canada are required to follow the interest rates that are fixed up by the FED of the Bank of Canada. Any increase or decrease in the rates, no matter how insignificant, is expected to reflect in the rates of the other banks. It is important to explain the term inter-banking rate which is the rate at which the Canadian banks lend or borrow money amongst themselves.


There is always the question if the variable interest rate will be hiked up again in Canada. The answer in most cases like this will be unpredictable, but according to financial experts who are focused on the health of the economy of Canada, the interest rates will not increase, at least not until the month of June in 2010. This is mainly because FED of the Bank of Canada predicts that an increase in the variable rates before that will make the economy of Canada inconsistent as rigorous, sudden and drastic changes in the rates will not help any economy. So the Bank of Canada has put in place checks and balances in order to help stabilize the economy and to protect the life savings and retirement benefits of small investors and help them earn a decent interest.

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