Variable Rate Mortgage
As a Canadian, when choosing a mortgage, variable interest rates versus fixed interest rates are one key to finding the mortgage that is right for you. Fixed rate mortgages are typically higher than variable mortgage rates but will not change for the duration of its term, ensuring that your monthly payment will not increase due to market conditions. Variable mortgage rates also called floating mortgage rates are the opposite. They offer a lower initial rate but can fluctuate with the bank prime rate, leaving you more exposed in economic times when rates are on the rise. The variable rate mortgages in Canada are calculated based upon either adding or subtracting a percentage amount from the Bank of Canada Prime rate.
The variable rate mortgage has variable interest rates that adjust with the prime rate. The prime interest rate may go up or down and this may affect your monthly mortgage payments. When the prime rate goes up, more of your mortgage payment will go to pay down interest; and when the prime rate goes down, more of your mortgage payment will go to pay down principal. In the event that the variable mortgage rates rise past what your mortgage payment would cover in just interest payments, your payment can be adjusted upward or your amortization could be extended. Interest rate is affected by the Canadian economy and monetary policies, such as the prime rate, are set by the Bank of Canada.
Are a Variable Rate Mortgages right for you? Here are some questions to help you determine whether the VRM is the right financial tool for you.
- I am ok with a fluctuating monthly payment if prime rate moves
- I need a mortgage that will allow me to break it without penalty after 3 yrs in the term.
- I want to take advantage of the lower interest rates that a below prime mortgage provides, regardless of what fixed rates are doing.
- My credit is good and I have at least 5% down payment (purchases) or 10% equity (refinances).
Outline your goals before choosing a mortgage
Before you decide whether to go variable or fixed, outline your goals. For example, If you are looking to pay down your mortgage debt as fast as possible, you will likely want a different product than if you want to maximize cash flow.
Variable rate mortgages versus fixed rates mortgages is only one of the things you’ll need to decide. It is also really important to consider other mortgage options you might not know about such as lump sum and flexible payments. You can talk through your goals with your mortgage broker to help you assess the options at a number of different lenders.
Run the numbers on different scenarios
Ask your mortgage broker to run the numbers on different scenarios. If interest rates rise by 1% in the next 5 years, how much more you will pay in interest, versus if rates stay put. How does the math change if rates go up by 2%? And how much will your monthly payment change in each of these scenarios.
You should know that many lenders will let you “fix” your payment even if you have variable rate mortgages. What this means is that as rates rise you’ll simply pay more towards interest than and less towards the principle. This is a way to have certainty with your monthly payment, but without paying the higher rate to go fixed.
Know yourself and how you feel
The third factor is your emotions. The GLM Mortgage Group provides this litmus test on whether to choose variable or fixed: “If you are driving in to work and you hear that the Bank of Canada is raising rates, will this cause you to panic, pull over and call me? If so, you should go fixed. Variable clients need to be okay with fluctuation.”
Signing up for your first mortgage is a big deal. Ask questions to ensure that you get the best product for your circumstances, and when it comes up for renewal in five years ask these questions all over again. Don’t fall into the trap of renewing without thinking because you may miss out on getting the best deal available.
To learn more and to get the best variable mortgage rates contact the GLM Mortgage Group to get a fast ‘YES’ at the sharpest rate guaranteed.
If you want the best rate for a variable rate mortgage visit GLM Mortgage Group for all the options available to you.