25 September 2012

It depends on the changes in market interest rates. It means that you can’t be sure about how muchof your original loan will be paid off during your mortgage term. Nevertheless, the lender will definitely give you an estimate based on the rate you get at the beginning of the term.

There are two types of regular payments amount with a variable mortgage:

  • fixed, and
  • variable (the amount changes according to the interest rate tendencies).

The choice of a payment type depends on the lender and the terms of your mortgage.

The benefit of a variable rate mortgage is that variable rates are usually lower than the fixed ones. That’s why this type of mortgage may be quite attractive for the short terms.

In other words, the benefits of your variable rate mortgage depend on whether the market rates rise or fall and it’s very difficult to predict these tendencies. For instance, during the period from 2000 to 2012 the Bank of Canada Bank Rate, which directly affects mortgage rates, varied from 0.25% to 6.0%.

Source: Bank of Canada, Bank Rate

Variable interest rate: tips for getting the best mortgage

Today some lenders may offer you interest rate caps or convertibility features on their mortgage loans. Such options can partially protect you from certain interest rate hikes. But these features become available only after signing a new mortgage agreement.

The notion “interest rate cap” refers to the maximum interest rate a lender can charge on your mortgage, regardless of the current rate increase.

If you have a mortgage with convertibility feature, you’re allowed to convert it into a fixed rate mortgage during the term. Usually, there are no penalties for such a conversion, but in some cases you may face certain requirements, that’s why it’s always better to consult your lender.

Pay attention:

If you decide to use the convertibility option, you should know that your new fixed interest rate may be higher than the variable one you had been paying.

Choosing between fixed and variable rate mortgages

Of course, both variable and fixed rates have their own benefits. In order to understand what type of a mortgage rate is the best for you, it’s necessary to consider a few important factors:

A fixed rate mortgage may be a good choice for you if:

A variable rate mortgage may be a good choice  for you if:

  • you need to be sure about what interest rate you have;
  • you’re not planning to change the amount of your regular payments during the mortgage term;
  • you would like to know in advance how much of your mortgage loan will be paid off at the end of the term;
  • you believe the market rates may rise during the term of your mortgage.
    • you’re sure you can afford an increase in your mortgage payment in case the rates go up;
    • you keep an eye on the current interest rate changes;
    • you believe the interest rates may remain unchanged or even fall during your mortgage term.

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