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Variable Rates are riskier but cheaper
A variable or adjustable mortgage rate fluctuates with the prime rate of the mortgage provider. If you take a variable rate mortgage, your payment will increase or decrease with the movement of the prime lending rates of the provider.
A variable interest rate is one that is adjusted periodically to reflect the current market conditions. Variable rates are quoted as prime less a discount or prime plus a premium. The prime interest rate is determined by the Central Bank’s key interest rate, which is the rate at which it lends funds to other banks. The Central Bank changes this rate in line with economic indicators, such as the rate of inflation and unemployment.
Variable rates are typically lower than fixed interest rates which is why some people are willing to take the risk of interest rate fluctuations and go with the variable rate. The difference between the rates paid on fixed and variable mortgages are the highest that they have been since 2011. When the spread between fixed and variable rates is low, it is sometimes better to choose the low-risk option of fixed rates.
If you choose to go with variable interest rates you can mitigate the risk of interest rate increases by making payments that are higher when interest rates are low. This reduces the principal and can act as a buffer when the rates increase.
Variable interest rates could affect the amortization period of your Barrie home
Most variable mortgage products have rates that are fixed for a period of time. If interest rates drop over that period then more of the principal is paid off. If they rise then less of the principal is paid and the term of the mortgage is extended. Alternatively, you may have opted to have the payment amounts move with the movements in the prime interest rates to ensure that your term does not fluctuate.
Penalties on fixed-rate mortgages are usually much higher than on variable mortgages, so if you are uncertain about when you plan to sell your Barrie home, you may be better off opting for a variable mortgage. In these circumstances, you could also choose a mortgage with portability options.Most variable mortgage products have rates that are fixed for a period of time. If interest rates drop over that period then more of the principal is paid off. If they rise then less of the principal is paid and the term of the mortgage is extended. Alternatively, you may have opted to have the payment amounts move with the movements in the prime interest rates to ensure that your term does not fluctuate.
Penalties on fixed-rate mortgages are usually much higher than on variable mortgages, so if you are uncertain about when you plan to sell your Barrie home, you may be better off opting for a variable mortgage. In these circumstances, you could also choose a mortgage with portability options.
If you walk away from a variable mortgage you will typically pay three months interest, whereas breaking a fixed term mortgage will cost you the higher of three months interest or the interest differential.
There may be vast differences between the terms and conditions of one mortgage and another, even within the broader categories. It is important that you obtain the mortgage with terms and conditions that cover your future requirements and at the best rates available.
The professional staff at Certified Mortgage Brokers Barrie can help you to make the choice of mortgage that suits your lifestyle and future plans.
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Take Advantage Of Difference
The larger the gap between the interest rate on a fixed rate mortgage and a variable rate mortgage the more chance there is that you will benefit from a variable rate. If the difference between a fixed rate and a variable rate is within just a percentage, then it is better to choose a fixed rate and enjoy having a peace of mind.
Your income, lifestyle and risk tolerance will weigh heavily on your decision and will inevitably determine which product suits your circumstance.
With variable mortgage rates you also have the option of an open or closed mortgage.
Open Term Mortgages
It an ideal option if you plan on fully paying off your mortgage in the near future, considering of selling your home, want to prepay a significant amount, or think that rates will go down. An open variable mortgage rate allows to pay off the mortgage during the term, or switch to another term at any time without any additional charges. Being open allows you to put down as much as you want, or pay off the entire mortgage at any time. It also lets you change to another term at any time, without charge. Due to the prepayment flexibility that you receive, higher interest rates apply than for a closed variable mortgage rate for the same term.
Closed Term Mortgages
For a closed variable mortgage rate, payments are usually fixed for the term and this option is ideal if you don’t plan to pay off your mortgage in the near future. You can still choose to pay off your mortgage during the term but this will involve a prepayment charge. The interests rates are lower than in an open variable mortgage and you can convert your mortgage to a fixed rate term of the same length or longer.
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