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What Your Need To Know About Variable Mortgage Rates
What Is A Variable Mortgage Rate?
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. Variable rate mortgages are based on a plus or minus variance of the lender’s prime rates. For example, the rates can be stated as prime rate plus or minus .70%. What this implies is that if the prime rate of the lender is 3%, you will pay a rate of 3.70% 2.30% after adjusting the plus or minus. Variable rate mortgages offer low rates but are unstable, and this can be unnerving for people with a low tolerance for risk. Variable rates for Ottawa are predicted to remain close to 2.70% at zero variance with the prime rates.
Should You Take A Variable Rate Mortgage?
Historically, variable rates are more affordable than fixed rate mortgages. A variable rate mortgage can help you save a lot of money in the long run, but it can also be risky. If you are a young person who is just starting a family, the fluctuations of a variable rate mortgage can disrupt your finances, especially if your income is limited. Depending on your financial standing, risk tolerance, family, and other factors, a variable rate can be right or wrong for you.
For guidance on which mortgage rate is suitable for your circumstances, consult a professional mortgage broker who can help you weigh every factor before taking the huge step.
Why Do Variable Rates Change?
Variable rates are subject to fluctuations in the prime rate of the lender. The lender’s rates change due to many factors. The prime rates of lenders vary mainly because of Bank of Canada’s interest rates. If the apex bank reduces interest rates, this action is meant to make lending more attractive, and lenders will also reduce their prime rates. On the other hand, if the Bank of Canada increases its rates, banks will also hike their rates, leading to an increase in the variable rate mortgages.
Note that while the variable rates can increase or decrease, the variance to the prime rate does not change.
Variable rates can also fluctuate due to competition among different mortgage providers, and the Ottawa area in particular witnesses stiff competition among the different mortgage providers.
Factors such as government policies, lenders’ risk tolerance, and availability of capital and so on also impact variable rate mortgages.
Variable Mortgage Rates in Ottawa
If you are buying a home in Ottawa, the common practice is to take a mortgage. Mortgages can come in different forms, but most people go for either a fixed rate or variable rate mortgage. Choosing between the two options can be hard if you don’t have any knowledge about mortgages. A professional Ottawa mortgage broker will help you find the best mortgage option that fits your financial and living standard.
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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.