Like a beach tide, interest rates ebb and flow. They can drop or climb depending on the state of our economy. For many Canadians, they don’t care about rising or falling interest rates and wish to have a steady interest rate for their mortgage term. Other Canadians want to take advantage of the possibility of a rate drop. For these borrowers there is the variable rate mortgage.
A variable rate mortgage is a loan in which the interest rate varies for the length of your term. This type of mortgage fluctuates with the prime lending rate. This is the rate at which Canadian banks lend funds to their best clients. The prime rate is set by the Bank of Canada.
The Bank of Canada plays close attention to our country’s economic conditions such as the rate of employment, and the impact of the manufacturing and export industry. These factors shape the inflation rate and the Bank of Canada adjusts the prime rate accordingly. If our economy is under-stimulated (high inflation), the prime rate will increase. On the opposite end of the spectrum, if our economy becomes over-stimulated, the Bank of Canada will lower the prime rate to make borrowing more accessible.
Variable rate mortgages provide borrowers with many advantages. For instance, this type of mortgage gives you more flexibility when it comes to payment options. Furthermore, variable rate mortgages allow you to potentially pay off your interest premiums quicker, especially if rates are low.
For variable rate mortgages you have two options for your monthly payments. You can choose a fixed payment, which is a set payment with the interest part fluctuating as rates change. This is beneficial if interest rates go down because most of the payment will go towards reducing your mortgage’s principal (the outstanding balance of your loan). For the second option you can have a fixed sum applied to the principal with the fluctuating interest portion altering the complete mortgage payment. This is referred to as a floating payment because your payments increase and decrease based on interest rate variations.
Before you make any financial decisions regarding your current or future mortgage, meet with a broker. A mortgage broker can advise you on whether or not you should go with a variable rate mortgage or take out a fixed rate one.Back
Your home is your most valuable asset. It is probably the single largest investment you will make in your lifetime. Your home is more than a place to rest your head and raise a family. Your home contains equity. It is a treasured resource and in some cases, can even be used as an ATM (aka cash back mortgages and HELOCs – don’t worry we’ll get there).
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