Do you have a variable rate mortgage?
Did you know that not all variable rate mortgages are equal?
One is a variable rate mortgage and the other is an adjustable rate mortgage or ARM. It’s important to know the difference when you commit to a mortgage product with a lender.
Many don’t realize that there are two different types of mortgages with floating rates. Both are commonly referred to as “variable rate” mortgages but they actually are not the same.
The type of floating rate mortgage you have will depend on which lender holds your mortgage. When the Bank of Canada adjusts the prime lending rate, the rate on your mortgage will change accordingly.
The Bank of Canada doesn’t just decide to raise or lower interest rates on a whim. It has eight scheduled interest rate announcements a year. If the Bank of Canada changes interest rates, that’s when it can affect you if you have a floating rate mortgage.
Here are some of the differences between the two.
Adjustable Rate Mortgage
The interest rate floats with the prime rate but the monthly payment will change as rates rise or fall. The amortization of your mortgage (how long it takes to pay it off) will not change.
There are pros and cons to an adjustable rate mortgage. You are forced to pay down your mortgage within the same timing you originally committed to with your lender. The downside is it can be difficult from a budgeting perspective if your mortgage payments keep increasing.
Variable Rate Mortgage
The interest rate floats with the prime rate but the monthly payments will remain the same unless interest rates rise to the point where you are no longer covering the required interest payments on the mortgage. The amortization of your mortgage will increase with rising rates and decrease if interest rates go lower than when your mortgage payment was originally set meaning you could pay off your mortgage sooner but conversely it could take you longer to pay off your mortgage and cost you more in interest charges.
We are currently in a rising rate environment, with the Bank of Canada raising rates 0.25% in March, 0.50% in April, 0.50% in June and a historical increase of 1% in July. No one has a crystal ball but we fully expect to see another 0.75% on Sept. 7, again on Oct. 26 and then again on Dec. 7.
Those who are currently in an adjustable rate (ARM) will face a 4.50% increase in their mortgage rates if this happens, with payments increasing accordingly.
Are you concerned about your mortgage payment rising further?
There’s another option rather than locking into a (higher) fixed rate, an option that creates a static payment for five years with no further payment increases.
If you are currently in an adjustable rate mortgage and you would like to schedule a review of your options, please schedule a time to chat here on my calendar. www.calendly.com/april-dunn I’m happy to review possible options with you.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
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