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What Your Need To Know About Variable Mortgage Rates!
Interest Depends On The Market
With a variable mortgage rate the amount of your payment is locked for your selected term, often a couple of years. However, although the payment is fixed, the interest rate on the mortgage will change with any fluctuations in the market rates. This means that if the interest rate goes down, more of your payment is used to pay off your principal and this lowers your overall costs. On the other hand, if the rates go up, a larger amount of your payment will go towards paying the interest costs and consequently this adds to your overall mortgage cost. The benefit of a variable mortgage rate depends largely on market rates.
Fixed Or Variable?
At Toronto Mortgage Brokerage 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. You can find more information on our fixed mortgage rate here.
Assess Your Paying Abilities
The first thing you should take into consideration when choosing a variable rate is whether or not you can afford to make payments if the rate increases. We can assist you in assessing your current income and the prospect of an increase in earnings. The second thing you must consider, after it is settled that you are financially prepared for possible fluctuations, is whether or not you are emotionally prepared. For some people, their personality does not have a high tolerance for risk and they prefer stability above all else. If you feel that rate changes will keep you up at night then it’s best to turn to a fixed mortgage rate instead.
Why Variable Rates?
A variable mortgage rate is typically associated with more risk and this isn’t completely untrue. The stability of the market is questionable and by choosing a variable mortgage rate there is both a possible benefit as well as a risk involved. With the help of our expert brokers you can make an educated decision with a reduced the risk factor.
Unlike with a fixed mortgage rate, variable rates remain low but you cannot be certain of the amount of your monthly payment.
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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.
What You Need to Know About CMB
How to Qualify
Typically, lenders use the benchmark of a 5-year fixed mortgage to test whether potential borrowers will be able to take on a 5-year variable mortgage. The reason for this is that it will prove that the borrower has enough rope to continue paying their mortgage even if interest rates go up unless interest rates soar extraordinarily high. That means borrowers with a higher debt-to-income ratio may find it harder to qualify for a variable mortgage.
Variable Rate Options
Depending on which lender you go with, you can choose between one of two types of variable mortgages:
Fixed payments: For your mortgage term, your payments are calculated so a portion pays of your principle and the rest your interest. You must always pay at least enough to cover your interest. With fixed payments, your payments don’t change but more goes towards your interest if rates go up and vice versa.
Floating payments: When you go for this option, your monthly payment amount will change along with the interest change (usually measured using the prime rate).
Variable rate mortgages can be found in almost just as many forms as fixed-rate mortgages with terms ranging from 5 to 25 years as well as varying down payment amounts.
What are the Advantages of a Variable Mortgage?
The possibility of paying less interest: All borrowers want to pay as little as possible on interest and as much as possible on their actual home. Because they start at a lower rate and with history on its side, variable rates tend to provide a lower interest rate for borrowers.
Flexibility: Variable mortgage rates tend to be more flexible when it comes to whether your mortgage is open or closed. This means more prepayment/refinancing options as well as lower penalty fees.
Of course, a variable mortgage always comes with a slightly higher amount of risk and uncertainty than a fixed-rate mortgage. This is also the chief reason why people reject a variable mortgage in favor of a fixed-rate. However, looking at recent history (the last 30 years or so), a variable mortgage has consistently been the winning bet in the long term.
Variable Rate Mortgage Statistics
Currently, about 1 in 4 of all new mortgages are 5-year and 1 in 5 existing mortgages are variable rate mortgages. However, this number goes up and down as predictions change for the interest rate market.
Variable mortgages start with a lower interest rate than fixed mortgages. Historically, the average difference between the two has been around 1.25%.
The Canadian prime rate has been relatively stable for the last two decades, although the trend has still been downwards. Over the last 3 years, interest rates have gone up slightly, around 1%.
Why Choose Certified Mortgage Brokers?
The key to finding the perfect variable mortgage product for you is to get enough exposure to different lenders and their products. We know of and have working relationships with all the top mortgage lenders in the Toronto area which puts us in the perfect position to help you compare options and choose the best product for you.
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