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A Cheaper, More Uncertain Route to Home Finance
At Certified Mortgage Brokerage Mississauga you will be given the choice of a fixed or variable mortgage rate and depending on your situation one option may be better than the other.
Variable mortgage rates are cheaper than fixed mortgage rates even when calculated over the long run, and for this reason, many Mississauga homeowners have chosen to go the route of variable interest rates. Variable rates offer no certainty when it comes to calculating the overall cost of servicing the debt and for many the uncertainty is unacceptable. This is especially so in an environment of increasing interest rates.
If you are willing to bear the risk of rising interest rates, there is little reason to pay the premium that is required to lock in your mortgage rates. Instead, you could pay the extra amount into your mortgage reducing the principal. By doing this you could mitigate the effect of a rise in interest rates.
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Variable Interest Rates Could Influence the Equity in Your Mississauga Property
If you opt for a mortgage with a variable interest rate the repayments stay the same for the term of the agreement but repayments to the principal amount will fluctuate according to the current interest rates. When interest rates drop, a larger portion of the repayment will go to the principal and when they rise less of the principal amount will be paid off.
This means the term of the contract may be longer or shorter than initially planned. This impacts on the overall interest cost and the amount of equity in your property. In environments where the interest rates rise steeply, the payment may no longer cover the interest accrued. Most lenders will allow you to change over to the fixed interest rate at any time during the contract and you should find out what the conversion rate will be prior to signing the agreement.
Variable rate mortgages are sometimes confused with adjustable rate mortgages where the payments are adjusted according to the prevailing interest rates
Variable rates are based on the prime lending rate that the Bank of Canada uses to determine interest rates for all banks in Canada. The Central Bank meets every few months to determine the overnight or key rate. Their decision in the respect is based on inflation and the strength of the economy.
The key rate is the cost that banks must pay to borrow from the Central Bank, which is why it has a direct effect on the prime interest rate. The variable interest rates will move up or down in tandem with the prime interest rate as variable rates are usually quoted as prime plus or minus a percentage.
Short Payments on the Principal Amount Could be Costly
Interest rate movements are hard to predict and they can change quickly at any time. Variable interest rates are cheaper than fixed rates as fixed rates must factor in the risk of interest rate increases. Variable rates could be the sensible option when interest rates are on a downward cycle, but in the current upward cycle could result in an extended amortization term.
Variable rates are riskier than fixed rates as you are open to interest rate fluctuations. Based on statistics the variable rate is the best option if you wish to pay the lowest interest rate, but the savings must be weighed against the risk of increased overall costs if shortfall payments to principal result in extensions to the overall term of the mortgage.
Before making a decision on which option to take, you should seek the advice of a local Mississauga mortgage broker.
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