Variable-Rate Mortgage Basics for Ontario Homeowners
August 10, 2017 | Posted by: Richard Allatt
One of your major tasks with a Ontariomortgage renewal will be deciding whether to take a fixed-rate or variable-rate product. Although fixed rates are a more popular choice, particularly for first time home buyers, let’s take a quick look at variable rates and when they’re a good choice.
Variable-rates are calculated based on prime and are typically lower than fixed rates. Generally, the payment amount is fixed and the agreement holds for a few years. When interest rates are low, more of your mortgage payment goes to paying down the principal – potentially reducing your amortization period and saving you money. But when interest rates go up, less of your payment goes to principal – potentially increasing your amortization period. Rates have been low for several years and are expected to stay low for several more but the fact of the matter is, it’s impossible to know when rates will change. In short, variable rates are a bit of a gamble and how you should weigh the risks and rewards depends on a couple of things:
Can you afford a 2% rate increase?
If your budget is tight and an increase in interest rates would seriously disrupt your life, chances are you should pass. The general rule of thumb is: If you can afford a 2% increase in rates, you can afford to take the risk.
Can you handle the stress?
Even if you can afford it, if you’re the kind of person who is going to lose sleep worrying about interest rate hikes, you might want to pass on a variable rate mortgage.
Can you make lump sum payments?
Variable rate mortgages make more sense when you expect to have funds available for lump sum payments while the rate is low. It’s all about making your money work harder for you.
If you decide go for it, try setting your variable-rate mortgage payment at the current five-year fixed rate. This will give you a buffer if rates rise and it will allow you to take advantage of the lower variable rate and put more of your monety toward the principal.
If you have questions about variable interest rate products and wonder if they might be right for you, talking to a qualified mortgage broker is a great way to start exploring your options. We are happy to answer any of your questions about debt consolidation, mortgage refinancing, or mortgage renewals.