– this is probably the #1 question we are asked during the Client Experience process and undoubtedly one of the most important financial decisions you and your family will make.
With a variable rate term, your interest rate is tied to the Bank of Canada rate and can go up or down over your term. If the Bank rate goes up, so does your rate. If the Bank of Canada rate goes down, your variable rate will follow. In most cases with a variable rate mortgage, your payment is fixed for the term. If your rate changes the amount of interest you could pay will increase or decrease as the prime rate changes. If the Prime Rate increases less of your payment will go towards the principal balance of your mortgage. If the Prime Rate decreases more of your payment will be applied to your mortgage balance, providing you the opportunity to pay down your mortgage faster.
During our conversations with clients we often refer to a study completed by Dr. Moshe Milevsky, York University, who examined Canadian mortgage rate data from 1950 to 2007 who found that:
* Choosing a variable rate mortgage would have saved Canadians $20,000 in interest payments over 15 years (based on a $100,000 mortgage)
* Canadians would have been better off borrowing at a prime rate (variable) compared to a five-year fixed rate 89% of the time.
As you can see, Homeowners who are comfortable with the risk of fluctuating interest rates can benefit from the possibility of greater long-term interest savings.
The other key difference between fixed and variable rates is the penalty that is paid if you need to break your mortgage early. Fixed rate mortgages can have a pre-payment penalty that is 9X higher than the variable rate. If flexibility is important to you than this is another reason for you to choose a variable rate.
“If history is a predictor, homeowners will refinance or sell their current home at some point during a typical five year term. A variable rate term gives homeowners more options.”
Warren Schatz, Mortgage Professional
Our portfolio of lenders including the big banks, credit unions, and monoline lenders offer variable rate solutions with additional advantages including:
* The freedom to convert at any time to a fixed rate mortgage with a term that’s at least as long as the one remaining on your mortgage.
* Repayment privileges such as doubling up your minimum payment, where the additional amount is applied 100% towards your mortgage principal or, in the case of specific lenders up to 20% of the original mortgage each year.
“One of my objectives as a professional mortgage advisor to discuss strategies with my clients on ways that can plan for changes in interest rates and pay down interest faster.”
Mike Cameron, Mortgage Professional
Is a variable rate mortgage right for you and your family? – Here is a summary of the key advantages:
* You are comfortable with rate fluctuations to gain possible long-term interest savings.
* You have the financial flexibility to accept possible increases in your amortization or minimum payment required should interest rates increase.