Fixed Rate Mortgage
A fixed rate mortgage product is one where the interest rate that is offered by the financial institution remains locked in place (fixed) for the entire mortgage term. This means that your monthly payments are also locked in and will not fluctuate over the course of your mortgage term.
Fixed rate mortgages come in a variety of different term lengths ranging from as short as 6 months up to 10 years. The interest rate that is offered by the lender will be determined based on the length of term you choose.
The main advantage of choosing a fixed rate is the fact that the borrower is safe from any rate increases during the mortgage term they choose. This makes financial planning and budgeting much easier.
One of the disadvantages of fixed rate mortgages is if rates were to decrease throughout your mortgage term, you may be stuck paying a slightly higher rate until the terms maturity date.
You always have the option to break your contract early. However, if you do so, you will be charged a penalty by the financial institution you arranged your mortgage with. The penalty amount is determined by the amount of time left remaining on your term and the interest rate on your mortgage. Each lender will have a slightly different way of calculating these penalty amounts so it is important that you get clarification on how the penalty is calculated prior to signing a contract with a lender.
Better yet, ask your mortgage specialist about penalties and how they work.
Fixed rate mortgages come in a variety of different term lengths ranging from as short as 6 months up to 10 years. The interest rate that is offered by the lender will be determined based on the length of term you choose.
The main advantage of choosing a fixed rate is the fact that the borrower is safe from any rate increases during the mortgage term they choose. This makes financial planning and budgeting much easier.
One of the disadvantages of fixed rate mortgages is if rates were to decrease throughout your mortgage term, you may be stuck paying a slightly higher rate until the terms maturity date.
You always have the option to break your contract early. However, if you do so, you will be charged a penalty by the financial institution you arranged your mortgage with. The penalty amount is determined by the amount of time left remaining on your term and the interest rate on your mortgage. Each lender will have a slightly different way of calculating these penalty amounts so it is important that you get clarification on how the penalty is calculated prior to signing a contract with a lender.
Better yet, ask your mortgage specialist about penalties and how they work.
Variable/Adjustable Rate Mortgage
A Variable Rate Mortgage and Adjustable Rate Mortgage are often assumed to be one in the same. However, there are actually a few slight differences between the two. But before we dive into that, let's discuss what the Prime Lending Rate is and how it changes.
Each major Bank in Canada controls their own Prime Lending Rate. In order for a financial institution to determine where to set their prime lending rate, they use something called the "Overnight Rate" (a.k.a. Policy Interest Rate) which is the interest rate set by the Bank of Canada.
The Overnight/Policy Rate is one of the tools that the Bank of Canada uses to control inflation in Canada. Generally speaking, if the economy is struggling, the Bank of Canada will lower the Overnight Rate making borrowing money more affordable. They hope that by making money cheaper to borrow, the general population will spend more money which in turn will boost the economy. The opposite happens if the Canadian economy is too strong. The Bank of Canada will increase the Overnight Rate making money more expensive to borrow with hopes of cooling the economy down.
If the Bank of Canada changes their Overnight Rate, the major Banks will adjust their Prime Lending Rate shortly after. These fluctuations are usually lock-in-step with the Bank of Canada's rate movements.
The Prime Lending rate is used as the base rate for all variable and adjustable rate mortgages. The interest rate on these types of mortgages are documented as a plus or minus off of the Prime Lending rate. For example, if the Prime Lending Rate is 4.00% and your mortgage contract offers you a discount of 0.50% off of the Prime Rate, your contract rate (the interest rate on your mortgage) at the start of your contract would be 3.50%.
Now, how do Variable and Adjustable rate mortgages differ...
Both of these products are based on the lender's Prime Lending Rate, and are therefore subject to change. However, each one of these products will react differently when there is a change to the Prime Lending Rate.
Variable Rate Mortgages
With a variable rate mortgage, while the mortgage rate is floating, your mortgage payment is not. Instead, the amount of interest contained within each payment will change making the interest portion more costly without affecting the original payment amount. The benefit to this is that it makes it easier from a budgeting standpoint. However, the downside to this is that unless you voluntarily start paying more, it will take you longer to pay off your mortgage and cost you more in interest in the long run.
Adjustable Rate Mortgage
With an adjustable-rate mortgage, similar to a variable rate, your mortgage rate is floating. However, unlike a variable rate mortgage, your mortgage payment will change when interest rates change. If rates go up, your mortgage payment will go up. If interest rates go down, your mortgage payment will go down. This product will not affect your amortization period.
The main advantage of Variable/Adjustable rate mortgages over fixed rate mortgages is the flexibility they offer. With a Variable/Adjustable rate mortgage you will always have the option of converting it to a fixed rate mortgage without paying any penalties or fees for doing so. The only catch is that you will have to lock into a term that is equal to or greater than your remaining term balance. For example, if you were 3 years into a 5 year variable adjustable term, you would have the option of locking into a 2 year term or greater. The interest rate would be set at whatever the lender is offering for that specific product at that time.
Another advantage is if you ever need to break a variable or adjustable rate contract early, the penalty you pay will only ever be calculated at 3 months interest, which is very reasonable when it comes to mortgage penalties.
Each major Bank in Canada controls their own Prime Lending Rate. In order for a financial institution to determine where to set their prime lending rate, they use something called the "Overnight Rate" (a.k.a. Policy Interest Rate) which is the interest rate set by the Bank of Canada.
The Overnight/Policy Rate is one of the tools that the Bank of Canada uses to control inflation in Canada. Generally speaking, if the economy is struggling, the Bank of Canada will lower the Overnight Rate making borrowing money more affordable. They hope that by making money cheaper to borrow, the general population will spend more money which in turn will boost the economy. The opposite happens if the Canadian economy is too strong. The Bank of Canada will increase the Overnight Rate making money more expensive to borrow with hopes of cooling the economy down.
If the Bank of Canada changes their Overnight Rate, the major Banks will adjust their Prime Lending Rate shortly after. These fluctuations are usually lock-in-step with the Bank of Canada's rate movements.
The Prime Lending rate is used as the base rate for all variable and adjustable rate mortgages. The interest rate on these types of mortgages are documented as a plus or minus off of the Prime Lending rate. For example, if the Prime Lending Rate is 4.00% and your mortgage contract offers you a discount of 0.50% off of the Prime Rate, your contract rate (the interest rate on your mortgage) at the start of your contract would be 3.50%.
Now, how do Variable and Adjustable rate mortgages differ...
Both of these products are based on the lender's Prime Lending Rate, and are therefore subject to change. However, each one of these products will react differently when there is a change to the Prime Lending Rate.
Variable Rate Mortgages
With a variable rate mortgage, while the mortgage rate is floating, your mortgage payment is not. Instead, the amount of interest contained within each payment will change making the interest portion more costly without affecting the original payment amount. The benefit to this is that it makes it easier from a budgeting standpoint. However, the downside to this is that unless you voluntarily start paying more, it will take you longer to pay off your mortgage and cost you more in interest in the long run.
Adjustable Rate Mortgage
With an adjustable-rate mortgage, similar to a variable rate, your mortgage rate is floating. However, unlike a variable rate mortgage, your mortgage payment will change when interest rates change. If rates go up, your mortgage payment will go up. If interest rates go down, your mortgage payment will go down. This product will not affect your amortization period.
The main advantage of Variable/Adjustable rate mortgages over fixed rate mortgages is the flexibility they offer. With a Variable/Adjustable rate mortgage you will always have the option of converting it to a fixed rate mortgage without paying any penalties or fees for doing so. The only catch is that you will have to lock into a term that is equal to or greater than your remaining term balance. For example, if you were 3 years into a 5 year variable adjustable term, you would have the option of locking into a 2 year term or greater. The interest rate would be set at whatever the lender is offering for that specific product at that time.
Another advantage is if you ever need to break a variable or adjustable rate contract early, the penalty you pay will only ever be calculated at 3 months interest, which is very reasonable when it comes to mortgage penalties.
Fixed Vs. Variable/Adjustable Rate
The right product for you will totally depend on you and your situation.
If you are really budget conscious and the thought of your mortgage payment fluctuating causes you to lose sleep at night, then a fixed rate mortgage is probably the right choice for you. If you can handle a little bit of risk and/or need some flexibility, then an adjustable/variable rate mortgage might be right for you.
There are also other factors to consider. For example, if you were purchasing a house but you weren't sure how long you were going to keep the property for, you might choose a variable/adjustable rate mortgage so that your penalty amount would be minimal should you decide to sell before the 5 years is up. Your rick tolerance, plans for the property and financial goals will also help in determining which product is best suited for your needs.
When the time comes, we will discuss all of the options available and together, we will determine which product is the right fit for you!
If you are really budget conscious and the thought of your mortgage payment fluctuating causes you to lose sleep at night, then a fixed rate mortgage is probably the right choice for you. If you can handle a little bit of risk and/or need some flexibility, then an adjustable/variable rate mortgage might be right for you.
There are also other factors to consider. For example, if you were purchasing a house but you weren't sure how long you were going to keep the property for, you might choose a variable/adjustable rate mortgage so that your penalty amount would be minimal should you decide to sell before the 5 years is up. Your rick tolerance, plans for the property and financial goals will also help in determining which product is best suited for your needs.
When the time comes, we will discuss all of the options available and together, we will determine which product is the right fit for you!
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Castle Mortgage Group
100-1345 Waverley Street
Winnipeg, MB, Canada
R3T 5Y7
100-1345 Waverley Street
Winnipeg, MB, Canada
R3T 5Y7