Mortgage Loan Factors to Consider
Variable rate and fixed rate mortgages both have their advantages and disadvantages! Historically speaking, homeowners tend to pay lower rates with variable mortgages, but these mortgages are also vulnerable to fluctuations because they’re tied to the Bank of Canada’s prime rate (which is announced eight times per year). Fixed rates, on the other hand, are typically higher than variable rates, but their rate is consistent throughout the term of the mortgage. Below are a few questions to help you give you a rough idea of which type of mortgage is right for you. These are just the basics. Our professionals dive much deeper into fixed and variable rates, and we have developed strategies around both fixed and variable rate mortgages that save our clients far more money then our competitors. When you’re ready, we’d be happy to share our strategies with you in a one-on-one meeting. In the meantime, here are the basics:
1. Can I afford to take a variable rate mortgage?
There is some risk associated with variable rate mortgages, so if you go this route, you must be able to mitigate the risk if rates do rise. One method of protecting yourself involves setting your mortgage payment to a fixed amount that’s higher than the minimum requirement. For example, setting your payments based on the current five year fixed rate will allow you to provide a buffer in the event that rates rise and, because you’re paying more than the minimum amount, you’ll be paying more of your principal as well. Opting for a 35-year amortization but paying the 25-year amortization-sized mortgage payment is another way to protect yourself from increasing rates. If they ever get too high for comfort, you can go down to the lower 35-year amortization payment until rates decrease again.
2. Does a variable rate mortgage fit my risk profile?
Once you have decided you can afford a variable rate mortgage, the next thing to assess is whether a variable rate mortgage fits your personality, lifestyle and comfort zone. If you’re the type of person that can’t sleep at night knowing that your rate may change by 0.25%, then a variable rate mortgage may not be the best option for you.
3. What type of variable rate mortgage should I choose?
There are three main factors to consider when choosing a variable rate mortgage:
1. Mortgage Payment frequency
Make sure you are aware of the options available before deciding. Some mortgage lenders may not allow certain variations of payment frequency (i.e. accelerated biweekly or weekly payments).
2. Mortgage Rate changes
Some mortgage lenders change their variable rates in line with the Bank of Canada – eight times per year – while others adjust them quarterly.
3. Conversion to fixed mortgage rate
Does the mortgage lender allow the mortgage to be converted to a fixed rate mortgage at any time? If so, what mortgage rate are you guaranteed on conversion – the best-discounted rate, the posted rate, or something else?
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If you would like to discuss all of your mortgage loan options in detail, and discover which mortgage product (fixed, variable, hybrid, HELOC) and more importantly which strategy is best for you and your situation, we’d be happy to help, so please contact us.