Is A Variable Rate Mortgage Right For Me?
When obtaining a mortgage, you need to make several choices to acquire the perfect lending product for your needs. One of the fundamental decisions you’ll have to make is choosing between a fixed rate or a variable rate mortgage.
A fixed rate ensures your interest rate and mortgage payment stay the same for the entirety of the term. On the other hand, variable rates are generally a premium or discount off of Prime Rate. This means that if ever the Prime Rate changes during your term, your interest rate changes with it. In most cases, your payment should fluctuate in accordance with the change in rate as well.
As you can see, the variable rate mortgage can be very beneficial. To help you take advantage of it, in this blog, Mortgages By Erin has covered the pros and cons of acquiring a variable rate mortgage and how you can make the most of it. After going through the details we’ve explained below, you should find it easier to determine if a valuable rate mortgage is right for you.
The benefits of a variable rate mortgage
1. Lower rates: Variable rates have historically performed better than fixed rates, but they come with additional risk as you may be subject to increases (or decreases) in your payments.
2. Flexibility: With variable rates, you are given the option to lock into current fixed rates at any time during the term without penalty. Thay way, in case the rates increase in the future, you don’t need to risk making higher payments.
3. Penalty calculations: If you sell your house, need to refinance, or have to break the mortgage before the maturity date - the maximum penalty that can be charged in most cases is three months of interest. This tends to result in a lower penalty than the Interest Rate Differential calculation, which is often applicable on fixed rate terms.
4. No additional fees: There are no additional fees to go with a variable rate mortgage compared to a fixed rate. This means that you have the chance to save more with this mortgage rate.
The challenges of a variable rate mortgage
Variable rate products can be risky as your payments may change during the term of your mortgage. Some borrowers may not be comfortable with the possibility of their payments increasing, so before going with a variable rate, you need to consider your long term goals and overall risk tolerance.
Additionally, you can ask yourself if you are comfortable with potential fluctuations in your payments. Also, consider whether or not you may want to sell or refinance mid-term. If so, a better penalty calculation should be considered.
How to make the most of a variable rate mortgage?
The best time to apply for a variable rate mortgage is when you are applying for a new mortgage or renewing your old mortgage. However, you must remember that if you opt for a variable rate mortgage, you should always:
a. Keep an eye on market conditions.
b. Stay up to date on Bank of Canada announcements. They generally dictate whether Prime Rate will remain the same, increase or decrease.
c. Look into what your payment might be with a few increases in Prime Rate. If the payments are no longer affordable after one or two increases in Prime, you might be better off going with a fixed rate.
For more details on variable mortgage rates, reach out to Mortgages By Erin. I am a licensed mortgage broker in Toronto, ON, with over ten years of professional experience. Over the years, my team and I have successfully helped several clients find the perfect mortgage to purchase their dream home. I am very passionate about helping my clients acquire their dreams, and I am willing to work with them throughout their mortgage journey so that they can obtain just what they need. I also educate them about the mortgage process and products available to them. That way, they feel confident in making their own decisions.
To learn more about my services, please click here. If you have any questions about mortgages, feel free to contact me here.