Understanding the Variable Rate Mortgage in Canada
When you are taking out a mortgage for your new home, one of the most important decisions you have to make involves the choice between a variable rate and a fixed rate mortgage. As you might be able to guess, a fixed rate mortgage keeps the same interest rate for the approved term, while a variable rate mortgage has an interest rate that fluctuates with market conditions. Understanding how a variable rate loan works can help you understand if it is the right product for your needs.
Variable Rates Mortgage Canada
Fixed payment, variable impact
If you sign up for a variable rate mortgage, your minimum payments will not change, even if interest rates go up while you still have the loan out. However, if rates climb, less of that minimum payment goes to the principal of the loan. This means that, if you keep to that same payment, you will have more principal left at the end of the loan’s term than you would have otherwise. If interest rates drop, more of your payment goes toward principal, helping you pay the balance of your loan more quickly.
The perils of prepayment
You might think that paying your loan off early can help you fight off the effects of increasing rates. However, that really depends on the type of loan that you have. If you have a closed mortgage and pay it off early, you can end up paying a hefty penalty, on the basis of your interest rate. If you have an open mortgage, though, you can pay it off early without penalty. The interest rates for an open rate are higher, as the bank wants to make more money off the loan, and if you pay it off to quickly the bank won’t make as much of a profit, leading to the higher interest rate. So if you think that you will be able to afford accelerated payments on your loan, run the comparative numbers on an open versus a closed mortgage to see which one makes the most sense for you.
Available terms for a closed mortgage
Most lenders will offer you terms ranging between one and ten years for a closed mortgage. Even though your loan may be amortized over 25 or 30 years, it is not legal in Canada to sign a mortgage with a term longer than ten year. When you reach the end of a loan, it is possible to renew it, but you can’t simply get one mortgage for the entire life of your loan, unless your financial situation allows you to pay off the whole balance during the first loan. Some banks will limit the amount of your loan that you can pay ahead of time. You can also set up your payments on a weekly, biweekly, semi-monthly, monthly or rapid weekly or biweekly plans. Some banks allow you to start out with a one-year open mortgage that is convertible to a closed mortgage.
Variable rate mortgage Canada history
Given the fact that interest rates remain at historically low levels, many find that there’s little reason at the present time to sign a variable rate mortgage. The common message is the only direction in which interest rates can meaningfully fluctuate is up, and so a variable rate mortgage does not make a lot of sense, particularly if you plan to stay in the loan for its full term. If you know that you have a windfall coming, then you can go ahead and take out a variable rate loan, secure in the fact that you will be paying off the balance of the note long before it amortizes. The difference between fixed and variable mortgage rates is quite small now, though, in large part because fixed rates are so low that there is almost no room below those rates for banks to make money off the variable variety. Variable rates have to be lower than fixed rates, because homebuyers are taking a risk that rates will go up later during the loan.
If you have questions about your own situation, talk to Amansad Financial. Your personal situation will be discussed and a plan will be put together to help you make the best decision. This is an exciting time in your life, and you don’t want to leave thousands of dollars on the table by signing the wrong deal. Call today!