It may seem simple just to call or research online for the best rate and mortgage conditions to go along with it, but to borrower’s surprise, they find out that this is not the case at all. Instead, they find the interest rates is a matrix of rates depending on the mortgage type and loan to value. Quite often online and radio ads, lenders like to advertise Insured high ratio mortgage products with loan to values greater than >80% up to 95% which is less than 20% down payment when purchasing a home. Loan to value is the mortgage balance divided by the value of the home to give you the LTV. Insured mortgages are usually lower in rate as they are default insured which protects the lender should the borrower miss their mortgage payments. Then all banks may vary on what they can offer under this category and the qualifications needed to get it.
Another category is Insurable mortgage which the lender can pay for the insurance themselves then pass the cost to the borrower through the higher interest rates. If you’re purchasing a home, it’s greater than 20% down payment. So the interest rates in this category are usually higher than Insured High Ratio mortgages and there are no CMHC premiums. The rates differ in this category as well depending on the loan to value which is the following: Up to 65% or >65.01% to 70% or >70.01 to 75% or >75.01 to 80%. Then each lender will differ in what rates they will offer in this category as well as the qualifications needed to get it.
Uninsured mortgages are mortgages that cannot be insured. They are usually the highest in rates with all banks/lenders in Canada as there is no insurance for the lender should the borrower default on mortgage payments. The LTV is up to 80% and if it falls under any of the following, you need to look at uninsured rates: has a purchase price over $1 million, or an amortization greater than 25 years, or doing mortgage refinance, or is a single unit rental property.
Variable rate mortgage rates are based on a lender’s prime rates and can go up and down during the term. In turn, prime rates are affected by the Bank of Canada raising or lowering the rates. The interest rate is expressed as Prime minus the discount from the lenders’ prime rate or Prime plus a certain amount from the Prime rate. Home equity line of credit mortgage interest rates are expressed in this way too. During the term of the mortgage, prime lending rates may change but the secured discount or amount to the prime lending rate remains the same during the term.
While the payment stays the same, the amount of interest you pay changes. Each mortgage payment goes toward paying the principal and interest. If the prime lending rate goes up, then more of your mortgage payment goes toward paying interest and less principal. If the prime lending rate goes down, then more of your payment goes toward paying the principal and less interest. However, there are a few products in some banks where the mortgage payment can change.
Advantages and disadvantages of 5 year Variable mortgages.
Variable rate mortgages have been popular the last few years due to many features. One of them being the penalty to break the mortgage is extremely low. If you obtain a mortgage through a mortgage broker, then the penalty to end the mortgage at any time is usually 3 months interest only to break before the 5 year term ends. This is most helpful to those who want to refinance or break the mortgage for any other reason.
Another popular advantage is savings when the interest rate environment is low. During this period of time, quite often the 5 year variable rate mortgages are much lower than 5 year fixed mortgages. This means you will pay down the principle of your mortgage balance faster with less of the payment going towards interest.
If you obtain a variable rate mortgage through a mortgage broker, you can switch the whole mortgage balance to fixed with their lenders without penalties or negotiation.
The major disadvantage is in the event the interest rates keep rising and it hits the trigger rate. This is when none or very little principal is being paid, only interest or in some cases, not enough interest is being paid. Depending on your mortgage contract and lender, you may be advised of a change to your mortgage payment. An example of this is when the Bank of Canada keeps raising rates in order to control inflation.
Another disadvantage is the interest rates will fluctuate during your mortgage term. You will want to pay attention to the Bank of Canada as to whether they raise or lower rates as this affects your bank’s prime lending rates. This in turn will affect the overall interest rate charged to your mortgage but the secured amount from your mortgage contract whether minus or plus to the prime lending rate will remain the same during the term. With some bank variable rate mortgage products, the mortgage payment may change during the term, this will be in the mortgage contract.
What Should be Your Choice?
If you’re comfortable with keeping up with the news regarding changing rates and with your mortgage going up and down in rates, then variable rate mortgages are for you. This is why people take some risk in order to experience higher savings when rates drop because these savings are astronomical compared to fixed rate mortgages and will help pay the principal off faster with less going towards interest.
Since working out the right mortgage product can be confusing, it is best to consult an experienced mortgage broker. Work with them to figure out the best options for you before making the final decision. The professionals will assist you with working out the mortgage payments for each month factoring in both fixed and variable rates.