A variable rate mortgage is a mortgage that bears an
interest rate that floats with the prime rate set by the Bank of Canada. If
mortgage interest rates go down, so does the mortgage rate of a client who has
a variable rate mortgage. Likewise if mortgage interest rates go up, so does
the mortgage rate of a client who has a variable rate mortgage.
In the past several years mortgage interest rates in Canada
have been at historic lows and so many Canadian homeowners continue to maintain
variable rate mortgages.
A closed variable rate mortgage is a mortgage that offers a
variable rate but is also closed. Banks generally offer closed variable rate
mortgages over 1, 3 or 5 years.
Choosing a closed variable rate mortgage means that you will
be guaranteed that your mortgage interest rate discount from the banks' prime
rate (if you have negotiated a discounted rate) will remain the same throughout
the term of your mortgage. The same is true of you don’t have a discounted
interest rate and you are paying at prime or even one or two percent above
prime.
Some variable rate mortgages are re-calculated immediately
while others are recalculated monthly or even every three months. A closed
variable rate mortgage (just like an open variable rate mortgage) could mean
that your monthly payment would be fixed throughout the term. This would mean
that if the Bank of Canada's interest rate changed (up or down) the amount of
your payment that is allocated to principal and interest would be adjusted
accordingly. In other cases and if you select a changing payment schedule, your
actual mortgage payments would increase or decrease according to whether the
Bank of Canada's lending rate has been increased or decreased.
All variable
rate mortgages enable you to lock in anytime to a fixed mortgage interest rate.
Generally, you can amortize your mortgage payments up to 30 years. You can
select a monthly repayment schedule that is monthly, semimonthly, weekly or
biweekly.
So how can you
determine if a closed variable rate mortgage is right for you? Typically you
would select a closed variable rate mortgage if you anticipate that the prime
lending rate is going to go down. You have to be sure that you can accept the
risk that if the prime lending rate goes up, so will your mortgages interest
rate.
Primarily the
world economy will dictate what happens with national lending rates. If you are
going to choose a variable rate mortgage product pay attention to the news.
Signs that the world's economy is improving will generally result in interest
rates going up. Alternatively, signs of a weakening world economy will
generally signal that mortgage interest rates will stay the same or even go up.
Staying informed
will be the best way to forecast what is going to happen with your mortgage,
otherwise a fixed rate mortgage product may be better for you. For more
information about closed variable rate mortgages please contact Paul Mangion at
GTA Mortgage Matters by calling 416-204-0156 or visit www.gtamortgagematters.com.
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