Ontario Mortgage News – Types of Mortgages Part 2: Variable Rate Mortgage

Are you getting ready to buy a home and obtain mortgage financing? Knowing your options before jumping in is important. This is part 2 of a 4 part series that gives you important Ontario mortgage news and information about the various types of mortgages available in Ontario. Getting a mortgage does not have to be stressful, and knowing what mortgage types are available to you can help keep the search for your perfect home stress-free.

This second Ontario mortgage news blog will focus on the variable rate mortgage. What is a variable rate mortgage? A variable rate mortgage is a type of mortgage financing that fluctuates according to rising or falling interest rates. This means that, when your mortgage broker finds a lender to approve your variable rate mortgage, your payment is not static and may change if interest rates change. There are many advantages to this type of mortgage.

Firstly, if you tend to follow the philosophy that no risk means no reward, you understand that taking some risks could equal major savings in the long run. A variable rate mortgage can provide this. Since it is based on the rate of interest, if this decreases, so does your monthly payment. If it decreases substantially, then this could equal big savings for you.

Another big benefit to a variable rate mortgage is the fact that variable rate mortgages usually offer the lowest mortgage rates available. Since the bank or lender approving your mortgage recognizes the risks that are inherent in a variable rate mortgage, they offer the lowest rate to you. This means that even if the interest rate does increase slightly over the term of your mortgage, you will likely not feel the sting.

It is important to remember though that as the Canadian economy improves, interest rates may increase if the prime lending rate is increased by the Bank of Canada. That being said, many lenders do provide options with variable rate mortgages that will allow you to lock in your variable rate mortgage if interest rates do increase.

Why choose a variable rate mortgage. If you are not afraid to take a bit of a risk in exchange for the chance to save, or if you are planning of staying in your house for a very short period of time, a variable rate mortgage may provide the best financial solution for you. However, if your plans are more long-term, you may want to discuss the option of a fixed rate mortgage with your mortgage broker.

Mortgages don’t have to be complicated, and you should avoid getting stuck in a mortgage you don’t understand by visiting a mortgage broker and getting them to explain all of the different options available to you.

For more Ontario mortgage news or to find out more about the benefits of a variable rate mortgage, please contact Paul Mangion of The Mortgage Centre at 416-204-0156 or visit www.themortgagecentretoronto.com.

What is a Closed Variable Rate Mortgage?

A variable rate mortgage is a mortgage that bears an interest rate that floats with the prime rate set by the Bank of Canada. If mortgage interest rates go down, so does the mortgage rate of a client who has a variable rate mortgage. Likewise if mortgage interest rates go up, so does the mortgage rate of a client who has a variable rate mortgage.

In the past several years mortgage interest rates in Canada have been at historic lows and so many Canadian homeowners continue to maintain variable rate mortgages.

A closed variable rate mortgage is a mortgage that offers a variable rate but is also closed. Banks generally offer closed variable rate mortgages over 1, 3 or 5 years.

Choosing a closed variable rate mortgage means that you will be guaranteed that your mortgage interest rate discount from the banks' prime rate (if you have negotiated a discounted rate) will remain the same throughout the term of your mortgage. The same is true of you don’t have a discounted interest rate and you are paying at prime or even one or two percent above prime.

Some variable rate mortgages are re-calculated immediately while others are recalculated monthly or even every three months. A closed variable rate mortgage (just like an open variable rate mortgage) could mean that your monthly payment would be fixed throughout the term. This would mean that if the Bank of Canada's interest rate changed (up or down) the amount of your payment that is allocated to principal and interest would be adjusted accordingly. In other cases and if you select a changing payment schedule, your actual mortgage payments would increase or decrease according to whether the Bank of Canada's lending rate has been increased or decreased.

All variable rate mortgages enable you to lock in anytime to a fixed mortgage interest rate. Generally, you can amortize your mortgage payments up to 30 years. You can select a monthly repayment schedule that is monthly, semimonthly, weekly or biweekly.

So how can you determine if a closed variable rate mortgage is right for you? Typically you would select a closed variable rate mortgage if you anticipate that the prime lending rate is going to go down. You have to be sure that you can accept the risk that if the prime lending rate goes up, so will your mortgages interest rate.

Primarily the world economy will dictate what happens with national lending rates. If you are going to choose a variable rate mortgage product pay attention to the news. Signs that the world's economy is improving will generally result in interest rates going up. Alternatively, signs of a weakening world economy will generally signal that mortgage interest rates will stay the same or even go up.

Staying informed will be the best way to forecast what is going to happen with your mortgage, otherwise a fixed rate mortgage product may be better for you. For more information about closed variable rate mortgages please contact Paul Mangion at GTA Mortgage Matters by calling 416-204-0156 or visit www.gtamortgagematters.com.